In: Finance
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 |