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Walshey co has already decided to accept a project and is now considering how to finance it. The asset could be leased over four years at a rental of $36000pa payable at the start of each year. Tax is payable 30%, one year in arrears. The post tax cost of borrowing 10%. Calculate npv
Here is kaplan answer.
Year. Cashflow Df 10%/. Pv$
0-3. (36000). 1000+2.487. (125532)
2-5. 10800. 3.170*0.909 31126
Total. (94406)
I didn’t understand how this year 0-3 and 2-5 came? And also 10800$ from where it came? Can you please explain me. Thank you In advanceThe lease payments occur at the start of each year.
The start of the first year is time 0, and for four payments it is therefore time 0 to 4.
The tax is payable one year in arrears and so the tax for the first year is calculated at the end of the first year (time 1) but paid one year later (i.e. time 2).
$10,800 is the tax saving on the lease payments 30% x 36,000 = $10,800.
This is all explained with examples in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Please watch them – you cannot expect me to type out all of my lectures here 🙂 🙂
Thank you so much for ur explanation. More appreciate to you sir.Thanks again sir
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