Question

Jan is choosing between three alternative investments, each of which will require a $100,000 initial outlay. Determine the present value of the after-tax cash flows from investment B described below.

Assume the following in your computations:

• Jan is in the 24% marginal bracket; Long-Term Capital Gains rate is 15%;
• All tax payments occur at the end of the year;
• 4% discount rate (present value interest factors are below).

N	PV $1	PV Annuity
1	0.962	0.962
2	0.925	1.887
3	0.889	2.776

Investment B is a corporate bond that will pay 7% interest at the end of each year for 3 years, with the principal recovered at the end of the 3^rd year. (the answer is $3,668, but can you show the work)

Answer 1

We will find after tax interest cash inflow

100000*7%=7000$

Tax =7000*24%

=1680$ per year

After tax cash inflow=7000-1680=

Years	cash flow	Pv factor	present value
0	(100000)	1	(100000)
1-3	5320	2.776 (use annuity as the interest income is for three year)	14768(5320*2.776)
3	100000	0.889	88900
		Net present value	3668$(14768+88900-100000)