A company anticipates incremental net income (i.e., incremental taxable income) of $20,000 in year 3 of a project. The company's tax rate is 30% and its after-tax discount rate is 8%.Click here to view Exhibit 14B-1 to determine the appropriate discount factor(s) using table.The present value of this future cash flow is closest to:

Question

Quizplus · Accepted Answer

To calculate the present value of the incremental net income, we need to discount the future cash flow to its present value. Using the after-tax discount rate of 8%, we can find the appropriate discount factor for year 3 in Table 14B-1. The discount factor for year 3 is 0.7938.

Next, we can calculate the present value of the incremental net income as follows:

Present Value = Incremental Net Income x Discount Factor 
Present Value = $20,000 x 0.7938 
Present Value = $15,876

However, this is the present value before taxes. To find the present value after taxes, we need to multiply by (1 - tax rate):

Present Value after Taxes = Present Value before taxes x (1 - tax rate) 
Present Value after Taxes = $15,876 x (1 - 0.30) 
Present Value after Taxes = $11,113.20

Therefore, the present value of the incremental net income is closest to $11,116 (rounded to nearest dollar), which corresponds to choice D.

A Company Anticipates Incremental Net Income (I