Isabel a calendaryear taxpayer uses the cash method of accou

Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $30,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $30,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40 percent this year and next year, and that she can earn an after-tax rate of return of 4 percent on her investments. a. What is the after-tax cost if Isabel pays the $30,000 bill in December? After-tax cost b. What is the after-tax cost if Isabel pays the $30,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) After-tax cost

Solution

(a) What is the after tax Cost if the Isabel pays the $30,000 Bill in December? After tax Cost = Pretax Cost - present value of tax Savings Present value of tax Savings =$30,000*40% =$12,000 After tax cost = $30,000 - $12,000 =$18000 (b)   What is the after tax Cost if the Isabel pays the $30,000 Bill in january? Tax Savings =$30,000*0.40= $12000 Present Value tax savings = Tax savings * Present Value factor at 4% for 1 year Present Value factor at 4% for 1 year=0.962 Present value of tax Savings =$12000 *0.962 =$11,544 After tax cost = pre tax Cost - Present Value of tax savings =$30,000 - $11,544 =$18456