Question

In: Finance

Your company is considering a new project that will require $10,000 of new equipment at the...

Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

A.

$476

B.

$924

C.

$1,400

D.

$1,851

Which statement is true regarding cost-cutting proposals?

A.	Cost-cutting proposals main benefits are from changes in sales and changes in costs.

B.	Cost-cutting proposals main benefits come only from changes in sales.

C.	Cost-cutting proposals main benefits come only from changes in costs.

D.	Cost-cutting proposals main benefits come from the change in sales due to the response from the cost-cutting proposal.

Expert Solution

		Y1	Y2	Y3	Y4	Y5	Total
Cost of investment=		10000
Scrap value=		3000
Total depreciable value=		7000
Depreciation every year	=1400/5=	1400
Benefit of Deprciation=	=1400*34%=	476	476	476	476	476
PV		=476/1.09	=476/(1.09^2)	=476/(1.09^3)	=476/(1.09^4)	=476/(1.09^5)
		437	401	368	337	309	1,851

Ans:D=$1851

2 Option C is true:

Cost cutting proposals main benefits come only from changes in cost.

Basically cost cutting proposals are measures which would result in reduction of costs and thereby profits can be increased.

jeff jeffy answered 2 years ago

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