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In: Finance

Suppose that Sudbury Mechanical Drifters is proposing to invest $10.9 million in a new factory. It...

Suppose that Sudbury Mechanical Drifters is proposing to invest $10.9 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the discount rate is 12%

a. What is the present value of Sudbury’s depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)

straight line schedule    year1 year2 year3 year4 year5 year6 year7 year8 year9 year10 Total
straight line 10 year

tax shields at 40%Tc
PV (Tax Shields) at 12 %

b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields?

double decline schedule year1 year2 year3 year4 year5 year6 year7 year8 year9 year10 total
Start of year Book Value
Depreciation
Tax Shields at 40% Tc
PV (tax shields) at 12%

c. What would be the present value of the tax shield if the government allowed Sudbury to write-off the factory immediately? (Enter your answer in millions rounded to 1 decimal place.)

percent value of depreciation tax shields

Solutions

Expert Solution

jeff jeffy answered 5 months ago
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