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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

Solutions

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 3 years ago
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