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1. A project is expected to generate per tax income of $90,000 p.a, starting in one year and running in perpetuity. Tax is payable 12 months in arrears at 20%. The after tax cost of capital is 8%
Sir, I am unable to solve this questions and seems like I have not read such questions in your lectures. Please help
I explain how to discount perpetuities in my lectures and how to deal with tax 🙂
The PV of the pre tax income is 90,000 x 1/0.08 = 1,125,000
The PV of the tax flows is therefore 1,125,000 x 20% x 1/1.08 = 208,333 (the 1/1.08 is to discount for the 1 year delay in the tax).
Therefore the PV = 1,125,000 – 208,333
(If you are unsure about discount perpetuities then look back at the Paper MA lectures, because this is revision from Paper MA).
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