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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%?

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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

jeff jeffy answered 2 years ago
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