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Greetings sir John,
I hope you’re doing well, and I do appreciate your entire efforts for all the community sincerely.
Scenario says : ” The lease will be over 5 years with lease payments of $146,000 annually in advance (at the start of each accounting period). Tax is payable 1 year after the accounting year-end, corporation tax rate is 25%…” and the cost of capital before-tax is 8%.
Requirement : What is the present value of the tax relief on the lease payments, after tax ?
My main issue here is which annuity factor to apply for years 2-6 tax relief of $146,000.
I learned from your lectures that normally I pick AF 6 less AF 1, but solution is something else.
Thanks for your attention.
I do not have the Kaplan Kit and so I cannot see what they have done in the answer.
However there are two ways of dealing with an annuity from 2-6.
One way is to take the 6 year annuity factor and subtract the 1 year factor.
The other way is to say that it is lasting 5 years but is starting 1 year late (at time 2 instead of time 1) and so discount for one extra year. So the 5 year annuity factor multiplied by the 1 year factor.
Both ways give the same answer (apart maybe for a slight rounding difference due to the tables only going to 3 decimal places, but rounding is irrelevant in the exam).