Hansen Company a cashbasis taxpayer paid 50000 for an asset

Hansen Company, a cash-basis taxpayer, paid $50,000 for an asset in year 0. Assume it can deduct one-half of the cost in year 0 and the remainder in year 1. Assume a 35 percent tax rate and 8 percent discount rate. Use Appendix A and Appendix B. (Round discount factor(s) to 3 decimal places, and intermediate calculations to the nearest whole dollar amount.)

a. Calculate the net present value of Hansen\'s after-tax cost of the asset.

b. Now assume Hansen borrows the $50,000 needed to purchase the asset. It repays the loan in year 2, with interest of $10,000. Calculate the net present value of Harmon\'s after tax cost of the asset under these new facts.

NPV of after-tax cost

$33,148selected answer incorrect

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Solution

a.

Present value of Cash Outflows at the end of year 1

Present Value Factor

Discounted Cash Flow

Value of Asset purchased

(A)

$                    50,000.00

1

$                    (50,000.00)

Depreciation Charges in year 0

(B)

$                    25,000.00

Depreciation Charges in year 1

(C )

$                    25,000.00

Tax benefit on Depreciation

$                    17,500.00

0.926

$                       16,205.00

Net cash Outflow during year

$                    32,500.00

$                    (33,795.00)

Present value of Cash Outflows at the end of year 1

$                    33,795.00

Present value of Cash Outflows at the end of year 2

Present Value Factor

Discounted Cash Flow

Depreciation Charge

0

Tax Benefit on Depreciation Charge

0

0.857

0

Present value of Cash Inflows at the end of year 2

0

Net Present value after tax cost

$                    33,795.00

b.

Present Value Factor

Discounted Cash Flow

Outflow due to purchase of asset

(A)

$                  (50,000.00)

1

$                    (50,000.00)

Loan taken

(B)

$                    50,000.00

1

$                       50,000.00

Depreciation Charges

(C )

$                    50,000.00

Tax benefit on Depreciation

Tax Benefit on Depreciation Charge

(C=50000*35%)

$                    17,500.00

0.926

$                       16,205.00

$                       16,205.00

Cash Inflow at the end of year 1

16205.00

Present Value Factor

Discounted Cash Flow

Refund of loan with interest at year end 2

(A)

$                  (60,000.00)

0.857

$                    (51,420.00)

Depreciation Charges

(C )

$                    25,000.00

Tax benefit on Depreciation

Tax Benefit on Depreciation Charge

(D=25000*35%)

$                       8,750.00

0.857

$                         7,498.75

Tax Benefit on Interest

(E=10000*35%)

$                       3,500.00

0.857

$                         2,999.50

$                    (40,921.75)

Cash Outflow in year 2

-40921.75

a.	Present value of Cash Outflows at the end of year 1
				Present Value Factor	Discounted Cash Flow
	Value of Asset purchased	(A)	$                    50,000.00	1	$                    (50,000.00)
	Depreciation Charges in year 0	(B)	$                    25,000.00
	Depreciation Charges in year 1	(C )	$                    25,000.00
	Tax benefit on Depreciation		$                    17,500.00	0.926	$                       16,205.00
	Net cash Outflow during year		$                    32,500.00		$                    (33,795.00)
	Present value of Cash Outflows at the end of year 1		$                    33,795.00