In an asset deal where the buyer receives a $30 million taxable asset write-up, what is the NPV given a WACC of 9% and a tax rate of 25%?

In an asset deal where the buyer receives a $30 million taxable asset write-up, what is the NPV given a WACC of 9% and a tax rate of 25%?

• A. $5 million
• B. $6 million
• C. $6.3 million
• D. $7 million

Answer: (C)

To determine the Net Present Value (NPV) of the taxable asset write-up in an asset deal, it's essential to understand how to calculate it based on the provided tax implications and discount rate. In this case, the asset write-up amount is $30 million. The write-up results in tax implications because the buyer can benefit from increased depreciation deductions due to this higher asset basis. The tax shield from the write-up can be calculated as follows: 1. Determine the tax savings due to depreciation. The depreciation expense, based on the asset write-up of $30 million, produces a tax shield calculated as follows: Tax savings = Asset write-up × Tax rate = $30 million × 25% = $7.5 million per year 2. Next, since this tax shield is a recurring benefit to the buyer, the NPV of this benefit must be computed over an infinite time horizon (assuming the asset has a perpetual life). This is done using the formula for the present value of a perpetuity: NPV = Annual tax savings / WACC = $7.5 million / 9% = $83.33 million However, the NPV needs to consider the upfront

To determine the Net Present Value (NPV) of the taxable asset write-up in an asset deal, it's essential to understand how to calculate it based on the provided tax implications and discount rate.

In this case, the asset write-up amount is $30 million. The write-up results in tax implications because the buyer can benefit from increased depreciation deductions due to this higher asset basis.

The tax shield from the write-up can be calculated as follows:

1. Determine the tax savings due to depreciation. The depreciation expense, based on the asset write-up of $30 million, produces a tax shield calculated as follows:

Tax savings = Asset write-up × Tax rate

= $30 million × 25%

= $7.5 million per year

2. Next, since this tax shield is a recurring benefit to the buyer, the NPV of this benefit must be computed over an infinite time horizon (assuming the asset has a perpetual life). This is done using the formula for the present value of a perpetuity:

NPV = Annual tax savings / WACC

= $7.5 million / 9%

= $83.33 million

However, the NPV needs to consider the upfront