A company anticipates a tax-deductible cash expense of $40,000 in year 2 of a project.The company's tax rate is 30%,and its discount rate is 10%.What is the approximate present value of this future cash outflow?

Question

Quizplus · Accepted Answer

To calculate the present value of the tax-deductible cash expense, we need to use the formula:

Present value = Future value / (1 + discount rate) ^ number of periods

In this case, the future value is $40,000, the discount rate is 10% and the number of periods is 2 years.

So,

Present value = $40,000 / (1 + 0.10) ^ 2 
= $40,000 / 1.21 
= $33,057

However, since the expense is tax-deductible, we need to adjust the calculation to account for the tax saving.

Tax saving = tax rate x future value 
= 0.30 x $40,000 
= $12,000

Adjusted future value = future value - tax saving 
= $40,000 - $12,000 
= $28,000

Adjusted present value = $28,000 / (1 + 0.10) ^ 2 
= $23,128

Therefore, the approximate present value of the tax-deductible cash expense is $23,128, which is closest to option B.

A Company Anticipates a Tax-Deductible Cash Expense of $40,000 in Year