Round to nearest whole dollar amount A-B Hansen Company, a cash basis taxpayer,

Question

Round to nearest whole dollar amount A-B

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 O and the remainder in year 1. Assume a 21 percent tax rate and 8 percent discount rate. Use Appendix A. 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 Hansen's after-tax cost of the asset under these new facts.

Explanation / Answer

1) Net Present Value :-

b) Net Present Value of Company H :-

Particulars Year 0 Year 1 Initial Payment (a) $50000 Cost Recovery Deduction $25000 $25000 Tax Saving on Cost recovery deduction ($25000*21%) (b) $5250 $5250 Net Cash Flow (b-a) ($44750) $5250 Discount Factor at 8% 1 0.926 NPV ($44750) 4862 Total NPV ($39888)

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