Taxpayer is considering the following investment. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash income produced 4,000 11,000 20,000 23,000 25,000 30,000 Cash expenses 1,000 5,000 6,000 8,000 8,000 10,000 Expenses...

Free

70.2K

Verified Solution

Question

Accounting

Taxpayer is considering the following investment.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Cash income produced
4,000
11,000
20,000
23,000
25,000
30,000
Cash expenses
1,000
5,000
6,000
8,000
8,000
10,000
Expenses that are tax deductible
None
80%
70%
80%
100%
75%
Marginal tax rate
20%
24%
24%
30%
30%
30%
Compute the present value of the after-tax cash flows of thisinvestment, using a discount rate of 6%. Note: This investmentbegins with year 1, not year 0. Your cash flows should bediscounted accordingly.

Answer & Explanation Solved by verified expert

4.3 Ratings (892 Votes)

As the investment begins in Year 1, not Year 0, this is an Annuity due where payments occur at the beginning of each period.

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Income	$4,000	$11,000	$20,000	$23,000	$25,000	$30,000
Expenses	0	$4,000 ($5,000*80%)	$4,200 ($6,000*70%)	$6,400 ($8,000*80%)	$8,000 ($8,000*100%)	$7,500 ($10,000*75%)
Profit	$4,000	$7,000	$15,800	$16,600	$17,000	$22,500
Marginal tax rate	20%	24%	24%	30%	30%	30%
Tax on profits	$800 ($4,000*20%)	$1,680 ($7,000*24%)	$3,792 ($15,800*24%)	$4,980 ($16,600*30%)	$5,100 ($17,000*30%)	$6,750 ($22,500*30%)
After tax cash flow	$3,200	$5,320	$12,008	$11,620	$11,900	$15,750
PVAF	1	0.943	0.890	0.840	0.792	0.747
Present value of after tax cash flows	$3,200 ($3,200*1)	$5,016.76 ($5,320*0.943)	$10,687.12 ($12,008*0.890)	$9,760.8 ($11,620*0.840)	$9,424.8 ($11,900*0.792)	$11,765.25 ($15,750*0.747)

Present value of the after-tax cash flows of this investment = $3,200 + $5,016.76 + $10,687.12 + $9,760.8 + $9,424.8 + $11,765.25

= $49,854.73

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Taxpayer is considering the following investment.Year 1Year 2Year 3Year 4Year 5Year 6Cash income produced4,00011,00020,00023,00025,00030,000Cash expenses1,0005,0006,0008,0008,00010,000Expenses that are tax deductibleNone80%70%80%100%75%Marginal tax rate20%24%24%30%30%30%Compute the present value of the after-tax cash flows of thisinvestment, using a discount rate of 6%. Note: This investmentbegins with year 1, not year 0. Your cash flows should bediscounted accordingly.