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In part c ii) for finding the PV of selling price we take the tax liability and only multiply it with a yr1 discount factor and not 5 yrs annuity,why?
I am away from home at the moment and cannot access the question. I will reply tomorrow when I am home.
Hi,
It’s because tax is paid in arrears:First you calculate sales using 5 yrs annuity: 100,000 × $16 × 3.696 = $5,913,600
than you calculate tax based on ALREADY discounted sales: $5,913,600 × 30% = $1,774,080
But this amount of tax must be additionaly multiplied by 1/(1+11%) = 0.901 (“moved back by one more year”) to take into account payment of tax in arrears. 1,774,080 x 0,901 = 1598,4Alternative solution:
Sales: 100,000 × $16 × 3.696 = $5,913,600
Tax 1600 *30% = 480 – paid from year 2-6 so x 3,330 (4,231 annuity for 6 years – 0,901 – discount factor for 1 year) = 1598,4
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