Question

Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase:

Testbank Question 51 Arnold Company is acquiring a new machine with a life of 5 years for use on its production line. The following data relate to this purchase: Cost of new machine Annual cost savings in cash expenses Terminal value Maintenance required in the 4th year Book value of the old machine $100,000 45,000 8,000 5,000 20,000 The new machine would replace an old fully-amortized machine. The old machine can be sold for $15,000 at the time the new equipment is acquired. The income tax rate is 30%, and the discount rate is 12%. Arnold uses the straight-line method for amortization on all machines (ignore the half-year convention). Note: some amounts are rounded. The present value of the total tax savings from the amortization tax shield is: 0 $21,630.00 O $46,432.40 0 $50,470.00 0 $19,899.60

Answer 1

Answer : $ 19,899.60

Incremental annual depreciation = $ ( 100,000 - 8,000 ) / 5 = $ 18,400

Tax shield of depreciation = Annual Depreciation Expense x t = $ 18,400 x 0.30 = $ 5,520.

PVA _{12 %, n=5} = [ { 1 - ( 1 / 1.12 ) ⁵ } / 0.12 ] = 3.605

Present value of total tax savings from depreciation tax shield = $ 5,520 x 3.605 = $ 19,899.60