Company Y began business in Feb 2012 ,by the end of the calendar year , it had b

Question

Company Y began business in Feb 2012 ,by the end of the calendar year , it had biled it is clients for 3.5 million of services and had incurred $ 800,000 of operation expenses .As of december 31 ,it had collected $ 2.9 million of its billings and had paid $ 670,000 of its expenses . it expects to collect the remaining outstanding bills and pay the remaining expenses by March 2013 , Company Y adopted a caleander year for fedrel tax purpose .It may use either the cash method or the accrual method of accounting on its first tax return , and has asked you to quantify the value of using the cash method for the first year .In doing so ,assume company Y uses 7 % discount rate to compute NPV

Explanation / Answer

Hi,

Please find the answer as follows:

Since, the company follows the calendar year for federal tax purposes, cash collected and paid till December 31 will be considered for the calculation of Net Present Value

Net Savings = 2900000 (Cash Collection) - 670000 (Expenses) = 2230000

NPV for 10 months (assuming partial calendar year)

NPV = 2230000/(1+.07/10)^10 = 2079745.33 or 2079745

NPV for the Complete Calendar Year = 2230000/(1+.07)^1 = 2084112.15 or 2084112

Thanks.

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