Question

7. Nick is choosing between two alternative investments, each of which will require a $50,000 initial outlay. Determine the present value of the after-tax cash flows from the two investments described below. Assume the following in your computations: • Nick is in the 32% marginal bracket; • 6% discount rate (present value interest factors are provided under the tax schedules); • All tax payments occur at the end of the year. Investment Ais bond investment will pay interest of $5,000 at the end of each year for 5 years, with the bond to be redeemed at par at the end of the 5th year. Investment B is a stock investment is expected to pay qualified dividends of $3,000 at the end of each year for 5 years, with the stock to be sold at the end of the 5th year for an estimated $57,500. PRESENT VALUE FACTORS, I = 6% Period o Single Sum Ordinary Annuity 0.943 0.943 0.890 1.833 0.840 2.673 0.792 3.465 0.747 4.212

Answer 1

INVESTMENT PLAN 1-BOND INVETMENT FEDXE PERIOD Particulars PV FACTOR UNPO Investment Interest Interest Interest Interest C = (B X 32%) DEB C E AFTER TAX CASH FLOW Tax CASH FLOW ($ 50,000) ($50,000) $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $50,0000 $50,000 0.943 0.890 0.840 0.792 0.747 0.747 TOTALT PRESENT VALUE ($50,000) $3206.20 $3026 $2856 $2692.80 $2539.80 $37350 $1670.80 Interest Redemtion INVESTMENT PLAN 2-STOCK INVETMENT B FEDXE PERIOD CASH FLOW Tax PV FACTOR نریماس Investment Dividend Dividend Dividend Dividend Dividend Profit on sale Proceed on sale ($ 50.000) $3000 $3000 $3000 $3000 $3000 $7500 $50,000 C = (B X 32%) D-B-C AFTER TAX CASH FLOW 0 ($50,000) $960 $2040 $960 $2040 $960 $2040 $960 $2040 $960 $2040 $2400 $5100 $50000 0.943 0.890 0.840 0.792 0.747 0.747 0.747 TOTAL PRESENT VALUE ($50,000) $1923.72 $1815.60 $1713.60 $1615.68 $1523.88 $3809.70 $37350 ($247.82) د يي BEST INVETMENT PLAN IS OPTION 1 I.E. BOND INVESTMENT

INVESTMENT PLAN 1-BOND INVETMENT FEDXE PERIOD Particulars PV FACTOR UNPO Investment Interest Interest Interest Interest C = (B X 32%) DEB C E AFTER TAX CASH FLOW Tax CASH FLOW ($ 50,000) ($50,000) $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $5,000 $1,600 $3,400 $50,0000 $50,000 0.943 0.890 0.840 0.792 0.747 0.747 TOTALT PRESENT VALUE ($50,000) $3206.20 $3026 $2856 $2692.80 $2539.80 $37350 $1670.80 Interest Redemtion INVESTMENT PLAN 2-STOCK INVETMENT B FEDXE PERIOD CASH FLOW Tax PV FACTOR نریماس Investment Dividend Dividend Dividend Dividend Dividend Profit on sale Proceed on sale ($ 50.000) $3000 $3000 $3000 $3000 $3000 $7500 $50,000 C = (B X 32%) D-B-C AFTER TAX CASH FLOW 0 ($50,000) $960 $2040 $960 $2040 $960 $2040 $960 $2040 $960 $2040 $2400 $5100 $50000 0.943 0.890 0.840 0.792 0.747 0.747 0.747 TOTAL PRESENT VALUE ($50,000) $1923.72 $1815.60 $1713.60 $1615.68 $1523.88 $3809.70 $37350 ($247.82) د يي BEST INVETMENT PLAN IS OPTION 1 I.E. BOND INVESTMENT