Question

1. Suppose that you are able to generate an annual depreciation deduction of $32,515 that would otherwise have been taxed at a 30% rate each year for seven years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the PV net benefit of depreciation assuming a discount rate of 6.5%. A. $12,315 B. $20,592 C. $32,907 D. $53,499

Answer 1

Annual Depreciation deduction for 7 years = $32,515

Annual Tax savings for 7 years each due to depreciation Expenses = $32,515*30%

= $ 9754.50

As in year 7 Tax due on Sale will be (Tax Obligation) = $32000

Net Tax Saving/(obligation) in year 7 due to sale = Depreciation Tax saving - Sale tax due

= $ 9754.50 - $ 32000

= -$ 22,245.5

Now Calculating the PV net benefit of depreciation assuming a discount rate of 6.5%:-

Year	Annual Tax Savings ($)	PV Factor @6.5%	Present Value of Annual Tax Saving($)
1	9,754.50	0.9390	9,159.15
2	9,754.50	0.8817	8,600.15
3	9,754.50	0.8278	8,075.25
4	9,754.50	0.7773	7,582.40
5	9,754.50	0.7299	7,119.62
6	9,754.50	0.6853	6,685.09
7	(22,245.50)	0.6435	(14,315.12)
		NPV	32,906.55

So, the PV net benefit of depreciation is $ 32,906.55

Hence, Option C. $ 32,907

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating