Choice "A" is correct. Present value is based on the cash flows of an activity. Amortization is a non-cash expense that is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.
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| PV of cash inflow, $7,500 × 1.74 | $ 13,050 |
| PV of cash outflow for tax ($7,500 − $5,000) × 40% × 1.74 | (1,740) |
| After-tax PV | $ 11,310 |
Choice "b" is incorrect. Amortization expense of $5,000 is a non-cash expense and is not used to compute after-tax present value. It is used to determine the cash paid for taxes.Choice "d" is incorrect. Amortization is a non-cash expense. It is not considered in the calculation, except to the extent it creates a tax shield. The tax shield reduces the amount of taxes paid out by the company. Choice "c" is incorrect. Present value is based on the cash flows of an activity. Amortization is a non-cash expense that is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.
