This problem set will help illustrate how the timing of taxable income / deductions and taxes paid
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Question:
This problem set will help illustrate how the timing of taxable incomedeductions and taxes paid affects the present value of cash flows.
Please see this separate google doc for guidance on calculating present values.
Instructions:
Please calculate the present value of the following series of cash flow transactions.
Hint: if the pretax cash flow and the tax cash flows are in different time periods, you will want to calculate their present values separately and then add them together.
Assumptions:
Calculate present values using whole years. You do not need to prorate by days, months, etc.
While taxes are paid throughout the year as the income becomes taxable you can assume to simplify the calculations that all taxable income and tax payments are madereceived at the same time at the end of the period.
The discount rate is
The tax rate is
n is the number of years in the future when the cash flow transpires.
Cash flow transactions:
Calculate present value of taxable income of $ received in the current taxable year n
Calculate the present value of taxable income and cash flow of $ that is not received until the next taxable year n
Calculate the present value of a cash inflow of $ received this taxable year n but that is not taxable until next year n
A business incurs a $ expense in the current taxable year. Calculate the present value of the aftertax cash outflow using three scenarios:
The expense is fully deductible in the current taxable year n
a The expense is deductive evenly over the course of five years. Hint: think of the annual tax savings as an annuity.
The expense is eligible for a tax credit that is equal to of the cost in year t The credit reduces the tax basis of the asset ie the amount that can be depreciated The remaining tax basis the k minus the credit can be depreciated evenly over five years. Hint: think of the annual tax savings from depreciation deductions as an annuity.
Now that we have an idea of how to calculate the NPV of a business expense, what other information do we need to evaluate whether to invest in the asset?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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