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Hello Sir,
As per below question i agree we need to deduct 1 year’s tax 30% of 20000, discount it and remove from the perpetuity value of tax. But why we did not remove 1-year discounted perpetuity value for the cash inflow also.
A company receives a perpetuity of $20,000 per annum in arrears, and pays 30% corporation tax 12 months after the end of the year to which the cash flows relate. At cost of capital of 10%, what is the after tax present value?
A. $140,000 B. $145,454 C. $144,000 D. $127,274Thank you
AvinashThe $20,000 is receivable in arrears and therefore the first receipt is in 1 years time (it is received at the end of the first year which is time 1, and the flows are thus 1 to infinity.
Using the discount factor of 1/r for the perpetuity is discounting a perpetuity starting in 1 years time.
Given the the tax is payable 1 year later, the tax flows are from 2 to infinity.
Have you watched my free lectures on this?
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