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- September 21, 2018 at 2:15 pm #475459
Hello Tutor,
For this question
” option 3-arranging three annual opeating lease which require $375,000 to be paid on 1Jan for each year of the project.has a 31 Dec year end and pay tax at 20% one year after the relevant year end .All lease payment are allowable againts tax in the year of payments ,cost of capital of 11%.
And what is the negative NPV?”The answer stated “PV of three year lease payment ($375,000) x 2.444 x1.11 = $1017315
Why the payment times 1.11? no inflation
September 22, 2018 at 6:40 am #475490It would help if you said which question you are referring to!!
The answer will be dividing by 1.11(not multiplying) in order to discount at 11% for a year.
September 22, 2018 at 1:40 pm #475526Its from Kaplan exam kit @Section B ,Question is relate to Deacon Co
But the answer provided is really is multiplying 1.11 not dividingAnd the Pv of tax savings from rent = 20% with 2 year delay =$1017315 x 0.20 / 1.11^2 =165135
Npv of operational lease =165135- 1017315 = (852180)September 22, 2018 at 3:13 pm #475533From the same question
“option 2-entering into a three year finance lease for which an initial deposit of $300,000 is payable on 1 January 20×1 followed by three annual payments of $295,000 payable on 31 December 20×1 to 20×3”What is the present value of the tax saving in respect of the initial deposit associated with the finance lease in Option 2(to the nearest $100)?
Answer is 300,000 x 0.2 /1.11^2= 49000
And My question is about the timing of the tax savings,as the 1 Jan 20×1 should be time 1 as their year-end is 31DEC which the time 0 will be 1JAN-31DEC 20×0,so the tax delay is one year therefore the tax effect shoud be in time 3? is it correct?
September 22, 2018 at 3:34 pm #475536First question:
Multiplying by the 3 year annuity factor of 2.444 would only give the value at time 0 if the flows were from time 1 to 3.
The flows are actually from time 0 to 2 and so multiplying by the annuity factor gives a PV one year easier than time 0, so multiply by 1.11 to get to a PV at time 0.I assumed you attempted the question before you looked at the answer? (otherwise of course you would be wasting the question), and so more obviously you should have said the PV of the flow at time 0 was 375,000, and got the PV of the flows at times 1 and 2 by multiplying by the 2 year annuity factor. You would get exactly the same answer (apart from rounding, which is irrelevant).
September 22, 2018 at 3:37 pm #475537Second question:
Time 0 is certainly not a period of a year – it is a point in time (1 Jan 20X0).
I explain everything about the tax timing in my free lectures on investment appraisal with tax, and on lease v buy. You cannot expect me to type out my lectures here 🙂
September 22, 2018 at 4:05 pm #475538I have watched the lease v buy lecture,which you have mention
“1Jan2017-31Dec 2017 is one year away and Dec2018 is two year away”
“Tax payable at the start of the year,tax is calculate at the end of the year,one year later,payable in another year later”Maybe I have misunderstood something ,Sorry!
September 23, 2018 at 8:09 am #475558Time 0 is 1 Jan 2017.
Tax Is calculated at the end of the year which is 31 Dec 2017.
The tax effect is one year later, which is 31 Dec 2018.
31 Dec 2018 is 2 years from 1 Jan 2017 and so is time 2.
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