Discussion:Present value? Future value? 2 aspirin is not enough
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Discussion Forum Index --> Tax Questions --> Present value? Future value? 2 aspirin is not enough
| 20 February 2008 | |
| Due to a misunderstanding of fact, partner 2 is going to pay $15,000 extra tax this year. He will recover this tax over the next 12 years. (Loss that would have been ordinary is now capital). Partner 1 is considering offering 1/2 of the interest cost on this transaction to Partner 2 as a friendly gesture, peace settlement.
How do I calculate this? I've been online looking at present value and future value calculators, and I don't see what I need. Am I searching for the wrong thing? The last time I did this was in anticipation of a college final many many years ago. | |
| 20 February 2008 | |
| Your payment is the amount you anticipate he will recover each year for the 12 years. The beginning Loan balance is the 15,000. The interest rate is to be detemined. I would do an amortization schedule in an excel worksheet based upon an beginning loan balance of 15,000 and each years anticipated recovery as the annual payment. Calcualte the interst on the beginning balance add it to the beginning balance and reduce this by the annual anticipated recovery. That gets you the next years beginning balance. Keep doing this until you amortize the amount over the 12 years, add up the interst and take 1/2 of it. Now if you want to present value the interest it is : Annual 1/2 interest / ((1 + Interest rate)^year) ( I think). So if you want to present value the third year interest of 300.00 at 5% the equation would be 300/(1.05)^3 or 300/1.157625 or 259.15. Add up the present values and you have the amount P1 would need to pay P2 now to cover the interest over 12 years at the stated interest rate. This macro is built into excel if you want it to calculate the amount. P1 can negotiate to pay all up front or pay the actual 1/2 interest each year. It is the same number if the stated interest rate become reality.
JND | |
| 20 February 2008 | |
| I hope you can read this with all the grammatical errors. I keep forgetting how to edit so I'm going to leave it. If it doesn't make sense let me know and I will go back and fix it. Where's the spell check???? | |
| 20 February 2008 | |
| Now that I think about this that won't recover all of it over 12 years as the interest will force it out past that period, but you can calculate to 12 years, which would recover the principal and leave it at that (kind of like a end of term balloon payment). That calcualtes the true interest carry over the period the principal would be outstanding. If the total is not recovered until year 12 then I think the equation is 15,000/((+Int Rate)^12)
Be aware that if the above is incorrect the secretary will disavow any knowledge of the calcuation. Good Luck This post will self destruct in 5 seconds. | |
| 20 February 2008 | |
| James,
Wow thank you for taking the time to explain all that! I confirmed your $259.15 calculated above with the factors provided by www.finance.cch.com Now I won't have to eat the rest of the contents in the aspirin bottle. Thank you! | |
| 21 February 2008 | |
| James,
I can't figure out how to do exponents in the spreadsheet, so I printed out the factors from CCH. Instead of dividing the interest by the factor, I am multiplying the interest by some number less than 1 per the CCH chart, organized by year and by interest rate. As I said before, I checked with your calculation, and also came up with $259.15 for the above. Here's what I don't understand: If Partner 1 is going to pay some amount to Partner 2 to compensate him for the lost interest on his cash, it seems like the interest at the end of the period should be given more weight than the interest at the beginning of the 12 years. Instead, as time marches on, the factors become smaller. At 3% interest, in year one, I am using .970874. In year 12, it is .70138. Am I not analyzing the situation correctly? Thank you again! | |
| 21 February 2008 | |
| I find that www.hsh.com has several useful calculators - who needs Tval anymore with the internet! http://www.hsh.com I believe the factors to which you refer simply result from the interest being calculated based upon a lower principal resulting after each payment, a portion of which is principal & a portion interest, though the periodic payment remains the same. | |
| 21 February 2008 | |
| BTW - if using Excel, use POWER(n,m) to raise n to the mth power. | |
| 21 February 2008 | |
| Thank you both for your comments.
Why isn't Excel doing this for me - and I even found it in the help index.....I enter POWER (5,2) and that is what I see. Tried also POWER(5,2). Also tried 5^2. I usually use Lotus, so I'm not as great in Excel as the rest of you. | |
| 21 February 2008 | |
| If Excel is balking when you type =power(n,m) then try it a different way... Go to the Insert menu, Function command, select All (from the left side), scroll down to Power (on the right side), click OK. It'll then walk you through the n,m part. It's slower than typing it in, but cool for when you can't remember exactly what order things go in inside the parenthesis. | |
| 21 February 2008 | |
| The interest at the end of the period has less weight because you are present valuing the amount of a future payment. In essence, year 12 needs less investment now to equal the interest when due. You could argue, and it may be correct, that you should take a 15,000.00 investment now earning 3 percent per year (15,000 *1.03^12*) (again, I think) and present value that amount back over the period. But I believe my first instinct was correct. P2 "placed" 15k in an investment earning 3% annualy and was returned some payments each year in the form of tax savings. The savings serve as "repayments" on the investment and the interst earned (or lost as is actually the case) on the remainder is the lost opportunity cost. I am sometimes guilty of getting these things backwards so it doesn't hurt to make sure of my logic. Its an A.D.D. thing. | |
| 21 February 2008 | |
| As for excel not calculating, make sure the Power function is a standard function and that you don't have to include an add-in to use it. I seem to recall that excell has additional functions that require you to turn them on as add-ins. But I enter =5^2 and get 25. If you do that and actually get 5^2 as an answer, make sure you don't have the cell format set as text. If you don't and still don't get the answer, try editing the cell by pressing f2 and press enter. I have had some issues with calcuations in excell not returning the answer from the function until they have been edited and reset. It is my observation, from my old programming days, that excel an array of memory addresses with object coding in each address. The equal sign triggers a call to a function and the movement fron one address to another or by pressing enter triggers the array to call all functions in use (recalculate). For some reason the latest version of excell is not doing that at all times. Sorry, I know this is more than you wanted but in addition to being A.D.D. I tend to ramble on in undectible tangents. | |
