A firm can invest in one of the two investments. Both have three year horizons, and both have an identical pretax cash flow of P100,000 per year. The taxes for the first investment are P60,000 in total, that is, P20,000 in each of the three years. The taxes for the second investment are also P60,000 but the tax is all due in the third year. The firm has 10% cost of capital. 1.What is the present value of taxes of the first investment? 2.What is the present value of taxes of the second investment? 3.What is the tax benefit ( discounted) of choosing the first investment over the second investment? 4.What is the tax benefit (discounted) of choosing the second investment over the first investment?
A firm can invest in one of the two investments. Both have three year horizons, and both have an identical pretax cash flow of P100,000 per year. The taxes for the first investment are P60,000 in total, that is, P20,000 in each of the three years. The taxes for the second investment are also P60,000 but the tax is all due in the third year. The firm has 10% cost of capital. 1.What is the present value of taxes of the first investment? 2.What is the present value of taxes of the second investment? 3.What is the tax benefit ( discounted) of choosing the first investment over the second investment? 4.What is the tax benefit (discounted) of choosing the second investment over the first investment?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A firm can invest in one of the two investments. Both have three year horizons, and both have an identical pretax cash flow of P100,000 per year. The taxes for the first investment are P60,000 in total, that is, P20,000 in each of the three years. The taxes for the second investment are also P60,000 but the tax is all due in the third year. The firm has 10% cost of capital.
1.What is the present value of taxes of the first investment?
2.What is the present value of taxes of the second investment?
3.What is the tax benefit ( discounted) of choosing the first investment over the second investment?
4.What is the tax benefit (discounted) of choosing the second investment over the first investment?
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