[Biff-1955-Tannen]

For the next two years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for two years is 1.7355. What is the lease’s after-tax present value using a 10% discount factor?

Net annual cash inflows = Cash inflow – income taxes

= $7,500 – (.40 x ($7,500 – $5,000))

= $7,500 – (.40 x ($2,500))

= $7,500 – $1,000 = $6,500

I don’t understand what this “adjusting for $5,000 per annum tax basis lease amortization” is. Can somebody explain what this is? When I hear amortization, I think amortization expense / tax benefit. Which is clearly not what is happening here.

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[ohiostategirlcpa]

Year 1: 7500 cash flow, (3000 tax), 2000 tax benefit = 6500

I get the same answer. And yes, amortization expense = tax benefit

F91 A95 R90 B94
CMA since 2015
(Gleim books/PDFs, MCQs, SIMS)

[Biff-1955-Tannen]

Ahhhhhhhh ok that makes sense now.

Thank you!!

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[Author]

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