Question
In: Finance
What are the relevant cash flows associated with depreciating a $200,000 capital expenditure over four years...
What are the relevant cash flows associated with depreciating a $200,000 capital expenditure over four years if the tax rate is 25% and the opportunity cost of capital 7%
What is the present value of all incremental cash flows associated with a capital expenditure of $100,000 today that can be depreciated in a straight line over 4 years if the tax rate is 25% and the opportunity cost of capital 10%?
Solutions
Expert Solution
| Relevant Cash flows in year 0 | (200,000.00) | |||
| Relevant Cash flows in year 1-4 = (200,000/4)*25% | 12,500.00 | |||
| Statement showing Cash flows | ||||
| Particulars | Time | PVf 10% | Amount | PV |
| Cash flows | - | 1.0000 | (100,000.00) | (100,000.00) |
| Cash flows | 1.00 | 0.9091 | 6,250.00 | 5,681.82 |
| Cash flows | 2.00 | 0.8264 | 6,250.00 | 5,165.29 |
| Cash flows | 3.00 | 0.7513 | 6,250.00 | 4,695.72 |
| Cash flows | 4.00 | 0.6830 | 6,250.00 | 4,268.83 |
| PV of Cash flows | (80,188.34) | |||
| Depreciation = (100,000 - 0)/4 | 25,000.00 | |||
| Tax savings on depreciation = 25000 *25% | 6,250.00 | |||
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