A- | ||||||||||
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Straight line depreciation = cost of equipment/life of equipment = 11.4/10 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 |
Tax Shield-35% of straight line depreciation = 1.1*35% | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 | 0.4 |
present value factor at 10% = 1/(1+r)^n r =10% n= 1,2,3,……………10 | 0.909091 | 0.826446 | 0.751315 | 0.683013 | 0.620921 | 0.564474 | 0.513158 | 0.4665074 | 0.424097618 | 0.385543 |
present value of tax shield = tax shield*present value factor | 0.4 | 0.3 | 0.3 | 0.3 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 |
B- | ||||||||||
rate of straight line depreciation | 1/life of equipment | 1/10 | 10% | |||||||
double declining rate | straight line rate*2 | 10*2 | 20% | |||||||
Year | beginning balance | double declining rate | annual depreciation = beginning balance*double declining rate | year end balance | ||||||
1 | 11.4 | 20% | 2.28 | 9.12 | ||||||
2 | 9.12 | 20% | 1.824 | 7.296 | ||||||
3 | 7.296 | 20% | 1.4592 | 5.8368 | ||||||
4 | 5.8368 | 20% | 1.16736 | 4.66944 | ||||||
5 | 4.66944 | 20% | 0.933888 | 3.735552 | ||||||
6 | 3.735552 | 20% | 0.74711 | 2.988442 | ||||||
7 | 2.988442 | 20% | 0.597688 | 2.390753 | ||||||
8 | 2.390753 | 20% | 0.478151 | 1.912603 | ||||||
9 | 1.912603 | 20% | 0.382521 | 1.530082 | ||||||
10 | 1.530082 | 20% | 0.306016 | 1.224066 | ||||||
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
start of the year book value | 11.4 | 9.1 | 7.3 | 5.8 | 4.7 | 3.7 | 3.0 | 2.4 | 1.9 | 1.5 |
Annual Depreciation using -double declining depreciation method | 2.3 | 1.8 | 1.5 | 1.2 | 0.9 | 0.7 | 0.6 | 0.5 | 0.4 | 0.3 |
Tax Shield-35% of annual depreciation = annual depreciation*35% | 0.8 | 0.6 | 0.5 | 0.4 | 0.3 | 0.3 | 0.2 | 0.2 | 0.1 | 0.1 |
present value factor at 10% = 1/(1+r)^n r =10% n= 1,2,3,……………10 | 0.909091 | 0.826446 | 0.751315 | 0.683013 | 0.620921 | 0.564474 | 0.513158 | 0.4665074 | 0.424097618 | 0.385543 |
present value of tax shield = tax shield*present value factor | 0.7 | 0.5 | 0.4 | 0.3 | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.0 |
Problem 6-18 Depreciation and project NPV Suppose that Sudbury Mechanical Drifters is proposing to invest $11.4...
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