Question

In: Finance

Find the present value of the depreciation tax shield and the present value of the after-tax salvage value


 Find the present value of the depreciation tax shield and the present value of the after-tax salvage value, if the annual depreciation is $6,000 for 5 years, the after-tax salvage value is $9,000, and the tax rate is 40%. The required rate of return is 10%. The lease lasts for 5 years.

 Present value of depreciation tax shield = $9,098 Present value of after-tax salvage value = $34,117

 Present value of depreciation tax shield = $22,744 Present value of after-tax salvage value = $5,588

 Present value of depreciation tax shield = $25,019 Present value of after-tax salvage value = $5,588

 Present value of depreciation tax shield = $9,098 Present value of after-tax salvage value = $5,588


Solutions

Expert Solution

Annual Depreciation 6000
Tax shield @ 40% 2400
Multiply: Annuity PVF at 10% for 5 yrs 3.79079
Present value of tax shield on depreciation 9097.896
After tax salvage 9000
Multiply: PVF at 10% for 5th year 0.620921
Present value of After tax salvage 5588.289
Answer is Present value of Dep tax shield $ 9098; Present value of After tax salvage $ 5588

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