Question

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.

Answer 1

Answer:

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

Answer 2

The Estimated present value of the tax benefits from depreciation is $15,017.54.

First  step is to calculate the annual depreciation expense

Annual depreciation expense =($100,000 − $25,000]/10

Annual depreciation expense =$75,000/10

Annual depreciation expense =$7,500

Second step is to calculate the tax benefit

Tax benefit =$7,500(0.34)

Tax benefit=$2,550

Third step is to calculate the present value of the tax benefit using financial calculator

PV of tax benefits:

PMT = 2550

FV = 0

N = 10

I = 11%

Hence:

PV =$15,017.54

Inconclusion the Estimated present value of the tax benefits from depreciation is $15,017.54.

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