Question

In: Finance

4. Your Company is considering a new project that will require $24,000 of new equipment at...

4. Your Company is considering a new project that will require $24,000 of new equipment at the start of the project. The equipment will have a depreciable life of 7 years and will be depreciated to a book value of $1,600 using straight-line depreciation. The cost of capital is 10%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation.

$1,088
$5,297
$2,112
$3,200

Expert Solution

Solution :

The present value of the tax benefits from depreciation = $ 5,297

The solution is Option 2 = $ 5,297

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

Note 1 :

The formula for calculation of the annual depreciation as per straight line method of depreciation is

Annual depreciation = ( Cost of the equipment - Book value at end of depreciable life ) / No. of years of depreciable life

As per the information given in the question we have

Cost of the equipment = $ 24,000 ; Book value at end of depreciable life = $ 1,600 ; No. of years of depreciable life = 7 years

Applying the above information in the formula we have

= ( $ 24,000 - $ 1,600 ) / 7

= $ 22,400 / 7 = $ 3,200

Thus the Annual depreciation as per the straight line method is = $ 3,200

Note 2 :

The Annual Depreciation Tax Benefit is calculated as follows

= Annual Depreciation * Tax Rate

= $ 3,200 * 0.34 = $ 1,088

jeff jeffy answered 9 months ago

Your Company is considering a new project that will require $880,000 of new equipment at the...

Your Company is considering a new project that will require $880,000 of new equipment at the start of the project. The equipment will have a depreciable life of 5 years and will be depreciated to a book value of $300,000 using straight-line depreciation. The cost of capital is 13%, and the firm's tax rate is 21%. Estimate the present value of the tax benefits from depreciation. $116,000 $91,640 $85,680 $24,360

Your company is considering a new project that will require $10,000 of new equipment at the...

Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation. A. $476 B. $924 C. $1,400 D. $1,851 Which statement is true...

5) Your Company is considering a new project that will require $960,000 of new equipment at...

5) Your Company is considering a new project that will require $960,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $372,000 using straight-line depreciation. The cost of capital is 11%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation (closest to). A) $48,510 B) $24,990 C) $128,602 D) $73,500 6) Your firm...

Your company is considering a project which will require the purchase of $685,000 in new equipment....

Your company is considering a project which will require the purchase of $685,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $244,000. Initial net working capital equal to 30.50% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $715,000 in new equipment....

Your company is considering a project which will require the purchase of $715,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $256,000. Initial net working capital equal to 32.00% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $725,000 in new equipment....

Your company is considering a project which will require the purchase of $725,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $260,000. Initial net working capital equal to 32.50% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $805,000 in new equipment....

Your company is considering a project which will require the purchase of $805,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $292,000. Initial net working capital equal to 36.50% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $775,000 in new equipment....

Your company is considering a project which will require the purchase of $775,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $280,000. Initial net working capital equal to 35.00% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $785,000 in new equipment....

Your company is considering a project which will require the purchase of $785,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $284,000. Initial net working capital equal to 35.50% of sales will be required. All of the net working capital will be recovered at the end of the project....

Your company is considering a project which will require the purchase of $825,000 in new equipment....

Your company is considering a project which will require the purchase of $825,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $300,000. Initial net working capital equal to 37.50% of sales will be required. All of the net working capital will be recovered at the end of the project....