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Depreciation Tax Shields Lincoln Company has purchased equipment for $800,000. After it is fully depreciated, the...

Depreciation Tax Shields Lincoln Company has purchased equipment for $800,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select either of the following depreciation schedules for tax purposes: Option 1 Option 2 Year Depreciation Depreciation 1 $160,000 $80,000 2 256,000 160,000 3 153,600 160,000 4 92,160 160,000 5 92,160 160,000 6 46,080 80,000 Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields. Round answers to the nearest whole number. Use rounded answers to calculate total.

Solutions

Expert Solution

Solution :-

Present value for Option 1 :-

Year

Tax saving (FV)

Present value ( Fv / ( 1 + r ) ^n )

= $160,000 * 40%

= $64,000

= $64,000 / [ [ 1 + 12% ]^1 ]

= $64,000 / 1.12

= $57,143

= $256,000 * 40%

= $102,400

= $102,400 / [ [ 1 + 12% ]^2 ]

= $102,400 / 1.2544

= $81,633

= $153,600 * 40%

= $61,440

= $61,440 / [ [ 1 + 12% ]^3 ]

= $43,732

= $92,160 * 40%

= $36,864

= $36,864 / [ [ 1 + 12% ]^4 ]

= $23,428

= $92,160 * 40%

= $36,864

= $36,864 / [ [ 1 + 12% ]^5 ]

= $20,918

= $46,080 * 40%

= $18,432

= $18,432 / [ [ 1 + 12% ]^6 ]

= $9,338

Total

= $57,143 + $81,633 + $43,732 + $23,428 + $20,918 + $9,338

= $236,192

Present value for Option 2 :-

Year

Tax saving (FV)

Present value ( Fv / ( 1 + r ) ^n )

= $80,000 * 40%

= $32,000

= $32,000 / [ [ 1 + 12% ]^1 ]

= $28,571

= $160,000 *40%

= $64,000

= $64,000 / [ [ 1 + 12% ]^2 ]

= $51,020

= $160,000 *40%

= $64,000

= $64,000 / [ [ 1 + 12% ]^3 ]

= $45,554

= $160,000 *40%

= $64,000

= $64,000 / [ [ 1 + 12% ]^4 ]

= $40,673

= $160,000 *40%

= $64,000

= $64,000 / [ [ 1 + 12% ]^5 ]

= $36,315

= $80,000 * 40%

= $32,000

= $32,000 / [ [ 1 + 12% ]^6]

= $32,000 / 1.9738

= $16,212

Total

= $28,571 + $51,020 + $45,554 + $40,673 + $36,315 + $16,212

= $218,345

ekkarill92 answered 1 year ago

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