Answer:
A. $12,600
B. $13,392
C. Isabel should pay the $20,000 bill in December
Explanation:
A. Calculation for the after-tax cost if Isabel pays the $20,000 bill in December
First step is to calculate present value tax savings
Present value tax savings=$20,000 x 37%
Present value tax savings= $7,400
Now let calculate the After-tax cost
After-tax cost = $20,000 - $7,400
After-tax cost = $12,600
Therefore the after-tax cost if Isabel pays the $20,000 bill in December is $12,600
B. Calculation for the What the after-tax cost if Isabel pays the $20,000 bill in January
First step is to calculate present value tax savings
Present value tax savings=($20,000 x 37%)* (Discount factor, 1 year, 12%)
Present value tax savings= $7,400 * .893
Present value tax savings=$6,608
Now let calculate the After-tax cost
After-tax cost= $20,000 - $6,608
After-tax cost = $13,392
Therefore the after-tax cost if Isabel pays the $20,000 bill in January is $13,392
c. Based on the above calculation for a and b Isabel should pay the $20,000 bill in the month of December reason been that in a situation where her payment is increase from the month of January to the month of December it will tend to lead to increase in the cash flow present value (PV) .
