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Hi There,
I’ve having trouble understanding why the calculation of the PV of subsidy benefit is different between Tippletine Co and Robson Co.
In Tippletine Co, the answer is:
Annuity Factor x subsidy rate benefit x loan amount
However in Robson the calculation is:
Annuity Factor x subsidy rate benefit x loan amount x (1-tax) (I think!)
Please could you clarify why the calculations are different?
Best regards,
BI am puzzled by your question because in Tippletine the benefit is also after tax (which is the reason for the 0.8 in the calculation).
HI,
Thanks for your reply.
Looks like Tippletine answer shows:
Benefit= $30,600,000 x (0.05-0.22) x 3.546 = $3,038,000
Tax relief lost = $30,600,000 x (0.05-0.022) x 0.3 x (4.329-0.952) = $868,000and in Robson:
Benefit = $40m x (0.09-0.035) x 0.8 x 3.240 = $5,702,400.
Apologies in advance but it seems i’m missing something which is probably quite obvious!
Thank you so much.
In Tippletine the tax saving lost is 1 year in arrears and so the tax relief lost is for years 2 to 5, which is why it is shown separately in the second line and the discount factor used is for 2 to 5 (whereas the interest itself is for years 1 to 4).
In Robson there is no delay in the tax and so there is no need to show it separately which is why there is just the one line (and the net benefit is multiplied by 0.8 to account for the 20% saving lost).
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