Isabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $45,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $45,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 20 percent this year and next year, and that she can earn an after-tax rate of return of 10 percent on her investments.

a. What is the after-tax cost if Isabel pays the $45,000 bill in December?

b. What is the after-tax cost if Isabel pays the $45,000 bill in January? Use Exhibit 3.1.

c. Based on requirements a and b, should Isabel pay the $45,000 bill in December or January?

December

January

EXHIBIT 3-1 Present Value of a Single Payment at Various Annual Rates of Return Year 4% 5% 6% 7% 8% 9% 10% 11% 12% 962 .952 .943 .935 926 .917 .909 .901 893 2 .925 .907 .890 .873 .857 842 826 .812 .797 3 889 864 .840 .816 .794 .772.751.731 .712 4 855 .823 .792 .763 .735 .708 .683 .659 .636 5 822 .784 .747 .713 681 .650 .62 .593 .567 6 .790 .746 .705 666 630 596 .564.535 .507 7.760 .711 665 .623 .583 .547 .513 482 452 8 731 .677 627 .582 .540 .502 467 434 404 9.703 645 .592 .544 .500 460 424 .391 .361 10 676 .614 .558 .508 463 422 .386.352 .322 11 .650 .585 .527 475 429.388.350.317 .287 12 625 .557 497 444 .397.356 .319.286 .257 13 601 .530 469 415 368.326 .290 .258 .229 14 .577 .505 442 .388 340 .299 .263 .232 .205 15 .555 481 417 .362 .315 .275.239 .209 .183