Your Company is considering a new project that will require $880,000 of new equipment at the...

Your Company is considering a new project that will require $880,000 of new equipment at the start of the project. The equipment will have a depreciable life of 5 years and will be depreciated to a book value of $300,000 using straight-line depreciation. The cost of capital is 13%, and the firm's tax rate is 21%. Estimate the present value of the tax benefits from depreciation.

$116,000
$91,640
$85,680
$24,360

Expert Solution

Annual Depreciation = (Cost Of The Asset- Salvage Value)/ Life Of The Asset
= $880000-300000/5 years

= $116000 per year

Tax on depreciation =$116000*21%=24360

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.13^a	d=b*c
1	$ 24,360	0.884956	$ 21,557.52
2	$ 24,360	0.783147	$ 19,077.45
3	$ 24,360	0.69305	$ 16,882.70
4	$ 24,360	0.613319	$ 14,940.44
5	$ 24,360	0.54276	$ 13,221.63
Present value of tax benefits			$ 85,680

jeff jeffy answered 2 years ago

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