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.

Question

Business

Pablo Mack

12 May, 00:21

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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Answers (1)

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Waylon Allen · Answer 1

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