Week 4--Discussion

This unit focuses on an important tool used in our everyday lives. Based solely on time value of
money techniques (rationale), do you think it is logical for people to over pay their taxes throughout
the year and get a refund? Keep in mind the U.S. government does NOT credit you with interest for
monies withdrawn from your pay checks throughout the year.
Sol
No, I do not think that only Time Value of Money can be used as a basis to calculate over pay of
taxes. I am not in favour of paying over tax and then wait for the refunds. Overpaying taxes does
not hold any advantage as such but their are quite a few limitations to it. One, when you over pay
tax, then one has to file a return in a limited timeframe or else the overpaid money is not
reimbursed, which means one can easily lose its money. Unless there are extenuating circumstances,
the IRS limits the time you have to claim a refund of your overpayments to three years from the
original filing deadline. Second, there is no additional benefit provided by the government, it the
form of cash or kind to those who over pay. Third, the books of accounts has to be changed
accordingly, if the over tax is returned. But according to, Business Times Most Americansa full
75%receive refunds after filing their taxes (Kit Yarrow). Understandably, people do so to avoid
an unexpected tax payment come April 15, with the idea that its better to withhold a bit more to be
on the safe side. The paying of extra tax money or not depends solely on how a tax payer sees the
scenario.

Reference:

Kit Yarrow, Why Were So Irrational When It Comes to Tax Refunds, 2013,
http://business.time.com/2013/03/18/why-were-so-irrational-when-it-comes-to-tax-refunds/

[Tax]

Bibliography
Tax: Kit Yarrow, Why Were So Irrational When It Comes to Tax Refunds, 2013,
http://business.time.com/2013/03/18/why-were-so-irrational-when-it-comes-to-tax-refunds/

1.
You will receive $1,000 at the end of the next 10 years, assuming a 7% discount rate, what is
the present value of the cash flows?
Present Value = $1,000/.07[(1-1/(1.07)^10)]
= $14285.71[(1-1/1.967)
= $14285.71[1- .508]
= $7028.57

2.
You deposit $5,000 into a retirement account at the end of the next 15 years earning 8%
interest, what is the future value of your retirement after 15 years?
Present Value (PV) = $ 5,000
Nper = 15 years
Interest = 8%
Future Value (FV) = $5,000 x 1.08^15
= $15,860.85

3.

What is the value of a perpetuity with an annual payment of $100 and a discount rate of 6%?

Value of perpetuity = Annual Payment / Discount Rate

= $100/.06
= $1666.67

4.

What is the value of a perpetuity with an annual payment of $50 and a discount rate of 4%?

Value of perpetuity = Annual Payment / Discount Rate

= $50/.04
= $1250
5.
You put $5,000 in an investment account today which will earn 6% over the next 11 years,
what is the future value?
Present Vale (PV) = $5,000
Nper = 11 years
Interest = 6%
Future Value (FV) = $5,000 x 1.06^11
= $9491.49