Question

In: Finance

Suppose that you are able to generate an annual depreciation deduction of $34,000 that would otherwise...

Suppose that you are able to generate an annual depreciation deduction of $34,000 that would otherwise have been taxed at a 30% rate each year for five years. Determine the present value of the annual tax savings using a 7.5% discount rate.

Solutions

Expert Solution

Annual Depriciation = $ 34000

Tax Savings on depreciation = 34000 * 0.30 = $ 10200 for 5 years.

Discount Rate = 7.5 %

Present Value of Tax Savings on depreciation = 10200 * PVAF ( 7.5 %, 5)

                                                               = 10200 * 4.0457

                                                            = 41266.14

Breakup of Present Value of Tax Savings on depreciation

Present Value of Tax Savings on depreciation for Year 1 = 10200 * 0.9302 =9488.04

Present Value of Tax Savings on depreciation for Year 2 = 10200 * 0.8653 =8826.06

Present Value of Tax Savings on depreciation for Year 3 = 10200 * 0.8049 =8209.98

Present Value of Tax Savings on depreciation for Year 4 = 10200 * 0.7488 =7637.76

Present Value of Tax Savings on depreciation for Year 5 = 10200 * 0.6965 =7104.30

jeff jeffy answered 2 years ago
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