The municipal government has imposed a temporary, five-year tax increase on the
ID: 2763903 • Letter: T
Question
The municipal government has imposed a temporary, five-year tax increase on the value of property that will raise $80 million at the end of the first year. Property values are setimated to grow at a rate of 3 percent per year. a. What is the present value of the total amount of tax the proposal will raise if the discount rate is 8 percent? b. What is the present value of the total amount of tax the municipal government could raise if the tax is permanent and the discount rate is still 8 percent?
Explanation / Answer
1) Present value =(PVF@8%,1*CF1).......(PVF@8%,5*CF5)
= (.92593* 80) +(.85734* 80*1.03)+(.79383*80*1.03*1.03)+(.73503*80*1.03*1.03*1.03) +(.68058* 80*1.03*1.03*1.03*1.03)
= 74.0744+ 70.6448+ 67.3739+ 64.2550+ 61.2799
= $ 337.63
2) Horizon value at year 1 = 80 (1+.03) /(.08-.03)
= 80 *1.03 / .05
= 1648
Present value =PVF@8%,1 *CF
= .92593 * (1648 +80)
= .92593 * 1728
= $ 1600.01