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1 November, 16:39

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

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  1. 1 November, 16:42
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    The multiple choices are:

    A.$13,607.52

    B.$14,841.29

    C.$15,017.54

    D.$16,997.13

    The closest option is C,$15,017.54

    Explanation:

    The yearly depreciation charge on the new equipment is computed thus:

    depreciation charge=cost - salvage value/useful life

    cost is $100,000

    salvage value is $25,000

    useful life is 10 years

    depreciation charge=$100,000-$25,000/10

    =$75,000/10=$7,500

    tax savings = depreciation charge*tax rate

    tax rate is 34%

    yearly tax savings = $7500*34%=$2550

    present value of tax benefits=tax savings*annuity factor (11% for ten years)

    annuity factor 11% for 10 years is 5.8892

    present value of tax benefits=$2550*5.8892=$15,017.46
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