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After-Tax Cost and NPV Analysis

The document contains 3 examples of calculating after-tax costs and benefits when given pre-tax amounts and a tax rate of 30%. 1) For a consulting fee of P100,000, the after-tax cost is P70,000. 2) For increased annual revenues of P40,000, the after-tax benefit is P28,000. 3) For a P210,000 scoreboard depreciated over 7 years, the annual tax savings from depreciation is P21,000. The document also contains an example calculating the net present value of an investment in shares to determine if a 12% minimum return was earned. It was determined that the negative N

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John Lester C Alag
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368 views7 pages

After-Tax Cost and NPV Analysis

The document contains 3 examples of calculating after-tax costs and benefits when given pre-tax amounts and a tax rate of 30%. 1) For a consulting fee of P100,000, the after-tax cost is P70,000. 2) For increased annual revenues of P40,000, the after-tax benefit is P28,000. 3) For a P210,000 scoreboard depreciated over 7 years, the annual tax savings from depreciation is P21,000. The document also contains an example calculating the net present value of an investment in shares to determine if a 12% minimum return was earned. It was determined that the negative N

Uploaded by

John Lester C Alag
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
  • Exercise 3: After-tax Costs
  • Exercise 4: Basic Net Present Value Analysis

CHAPTER 13 : EXERCISE 3 (AFTER-TAX COSTS)

REPORTER: CHRISTY HANNAH B. BANGA

a.) Sugar Company has hired a management consulting firm to review


and make recommendations concerning Sugar’s organization structure.
The consulting firm’s fee will be P100,000. What will be the after-tax cost
of the consulting firm’s fee if Sugar’s tax rate is 30%?

Solution:
Management Consulting Fee P 100,000
Multiply by: (100%-30%) 70%
After Tax Cost P 70,000
b.) The Royal Riding Club has redirected its advertising toward a
different sector of the market. As a result of this change in advertising,
the club’s annual revenues have increased by P40,000. If the club’s tax
rate is 30%, what is the after-tax benefit from the increased revenues?

Solution:
Increased Revenue P 40,000
Multiply (100%-30%) 70%
After Tax Cost P 28,000
c.) The Sparkling Stars Basketball Team has just installed an electronic
scoreboard in its playing arena at a cost of P 210,000. For tax purposes,
the entire original cost of the electronic scoreboard will be depreciated
over seven years, using straight-line method. Determine the yearly tax
savings from the depreciation tax shield. Assume that the income tax
rate is 30%.

Solution:
Annual Depreciation P 30,000
(P 210,000/7years)
Multiply (100%-30%) 70%
After Tax Cost P 21,000
CHAPTER 13: EXERCISE 4 (BASIC NET PRESENT VALUE ANALYSIS)
REPORTER: CHRISTY HANNAH B. BANGA

On January 2, Pebbles Cruz paid P 18,000 for 900 shares of Rainbow


Company. Ms. Cruz received an P 0.80 per share dividend on the shares
at the end of each year for four years. At the end of four years, she sold
the shares for P 22,500. Ms. Cruz has a goal of earning a minimum
return of 12% on all of her investment.

Required:
(Ignore income taxes) Did Ms. Cruz earn 12% return on the share? Use
the net present value method and the general format. Round all
computations to the nearest whole peso.
Present Value of Annual Cash Inflows for 4 periods at 12%?

[(900 x 0.80) x 3.03735] P 2,187


Sales ( P 22,500 x 0.63552) 14,299
Total Cash Inflows P 16,486
Less: Present Value of Net Investment 18,000
Net Present Value P ( 1,514)

1
DISCOUNT FACTOR= (1x(1+ DISCOUNT RATE) ^ PERIOD NUMBER)

1/(1+12%)^1)=0.89286
1/(1+12%)^2)=0.79719
1/(1+12%)^3)=0.71178
1/(1+12%)^4)= 0.63552
Total = 3.03735
Another Solution:
Year(s) Amount of 12% Present Value
Cash FlowsFactor of Cash Flows

Purchase of Now P (18,000) 1.0000 P (18,000)


the stock

Annual 1-4 P 720 3.03735 2,187


Dividends

Sale of the 4 P 22,500 0.635 52 14,299


stock

Net Present Value P ( 1,514)

*900 shares x P 0.80 per share per year = P 720 per year
Did Ms. Cruz earn 12% return on the share?

No, Ms. Cruz did not earn a 12% return on the share. The
negative net present value indicates that the rate of return on
the investment is less than the discounts rate of 12%.

a.) Sugar Company has hired a management consulting firm to review and make recommendations concerning Sugar’s organization
b.) The Royal Riding Club has redirected its advertising toward a different sector of the market. As a result of this change
c.) The Sparkling Stars Basketball Team has just installed an electronic scoreboard in its playing arena at a cost of P 210
On January 2, Pebbles Cruz paid P 18,000 for 900 shares of Rainbow Company. Ms. Cruz received an P 0.80 per share dividend o
1 DISCOUNT FACTOR= (1x(1+ DISCOUNT RATE) ^ PERIOD NUMBER)
Another Solution: Year(s) Amount of 12% Present Value Cash FlowsFactor of Cash Flows Purchase of Now P (18,
Did Ms. Cruz earn 12% return on the share? No, Ms. Cruz did not earn a 12% return on the share. The negative net present va

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