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? Do not round your intermediate calculations and round the final answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

To find the present value of the tax-deductible cash expense, we need to use the formula for present value of a single cash flow: PV = CF / (1 + r)^n, where PV is the present value, CF is the future cash flow, r is the discount rate, and n is the number of periods. In this case, CF = $40,000, r = 10% and n = 1 year (since the expense occurs in year 2). So, PV = $40,000 / (1 + 0.10)^1 = $36,363.64. However, since this expense is tax-deductible, we need to adjust for the tax benefits by multiplying the PV by (1 - tax rate). So, PV after tax benefits = $36,363.64 x (1 - 0.30) = $25,454.55. Rounded to the nearest whole dollar, the approximate present value is $23,140, which is the closest to option B. Therefore, option B is the best choice.

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