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John Moffat.
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Pallavibansal09- Topics: 1
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Please could you solve and explain this-
A project is expected to generate pre-tax income of $90,000 per annum, 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%.
What is the PV of the project flows (to the nearest $000)?Pallavibansal09- Topics: 1
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PV = 90/0.08 – {(90 × 0.2)/0.08) × 1/1.08} = 916,667
In the answer why is it not {90/0.08 – (90 × 0.2)/0.08)} × 1/1.08
John Moffat- Topics: 56
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Because the tax is payable 1 year in arrears and therefore the tax needs discounting for 1 extra year.
Pallavibansal09
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