Can someone help me with an NPV question? How come sometime in the problems to calculate the after take savings they just take the depr for the year mult by the tax rate and add it to NPV and other times they take the cash inflow minus the depr and mult by the tax rate and then subtract it?( Below is a question and answer that they do the latter of these two)
For the next two years a lease is expected to have net cash inflows of 7500 per annum, before adjusting for 5000 per annum tax basis lease amortization, and a 40% tax rate. The PV of $1per year for 2 years at 10% is $1,74. What is the leases after tax PV using 10% disc rate?
Choice “d” is correct. Present value is based on the cash flows of an activity. Amortization is a non-cash expense that is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.
PV of cash inflow, $7,500 * 1.74 = $13,050
PV of cash outflow for tax ($7,500 – $5,000) * 40% * 1.74 = (1,740)
After-tax PV 13,050-1740= $11,310
Thanks for any help im sure its just a small principal i gotta get down but for some reason im not getting this
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