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Dog chew Products needs to replace its rawhide tanning and molding equipment. It can be used...

Dog chew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 7%. The firm's tax rate is 40%. The CCA rate is 20% (Class 8).What is the present value of the depreciation tax shield?

Solutions

Expert Solution

Computation of Present value of Depreciation Tax Shield:

Depreciation p.a.             =             9,30,000.00/ 5years

                                                =             1,86,000.00

Particulars

Year1

Year2

Year3

Year 4

Year 5

TOTAL

1.Depreciation

186000.00

186000.00

186000.00

186000.00

186000.00

2. Tax Shield on depreciation (Depreciation *40%)

74400.00

74400.00

74400.00

74400.00

74400.00

3.Present Value Factor @20% (1/1.2^n)

0.8333

0.6944

0.5787

0.4823

0.4019

4.Present Value of Depreciation tax shield (2*3)

61997.52

51663.36

43055.28

35883.12

29901.36

222500.60

jeff jeffy answered 1 year ago
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