School

York University **We aren't endorsed by this school

Course

ADMS 4541

Subject

Finance

Date

Oct 29, 2023

Pages

1

Uploaded by DeanLoris1429 on coursehero.com

Question:
A company is considering an investment project that will result in
a taxable income of $200,000 in the first year. The corporate tax rate is 30%.
Calculate the present value of the tax shield generated by the project if the
discount rate is 8% and the project is expected to last for 5 years.
Answer:
To calculate the present value of the tax shield, you can use the formula:
PV(TaxShield)=∑t=1nT×TC(1+r)t
PV
(
TaxShield
)=
∑
t
=1
n
(1+
r
)
t
T
×
TC
Where:
PV(TaxShield)
PV
(
TaxShield
)
is the present value of the tax shield.
T
T
is the taxable income in a given year.
TC
TC
is the corporate tax rate.
r
r
is the discount rate.
t
t
is the year.
n
n
is the number of years.
In this case,
T = $200,000
,
TC=30%
TC
=30%
,
r=8%
r
=8%
, and
n=5
n
=5
. Let's
calculate:
PV(TaxShield)=200,000×0.30(1+0.08)1+200,000×0.30(1+0.08)2+200,000×0.3
0(1+0.08)3+200,000×0.30(1+0.08)4+200,000×0.30(1+0.08)5
PV
(
TaxShield
)=
(
1+0.08)
1
200,000×0.30
+
(1+0.08)
2
200,000×0.30
+
(1+0.08)
3
200,000×0.30
+
(1+0.08)
4
200,000×0.30
+
(1+0.08)
5
200,000×0.30
Calculating this using a calculator or spreadsheet software, you'll find that
the present value of the tax shield is approximately $414,080.68.

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