Hansen Company, a cash basis taxpayer, paid $50,000 for an asset in year 0. Assume it can deduct one-half of the cost in year 0 and the remainder in year 1. Assume a 35 percent tax rate and 8 percent discount rate.
a. Calculate the net present value of Hansen's after-tax cost of the asset.
b. Now assume Hansen borrows the $50,000 needed to purchase the asset. It repays the loan in year 2, with interest of $10,000. Calculate the net present value of Harmon's after-tax cost of the asset under these new facts.