Question

C and D please

Your firm is considering a project that would require purchasing $7.6 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 37%, the appropriate cost of capital is 10%, and the equipment can be depreciated: a. Straight-line over a ten-year period, with the first deduction starting in one year. b. Straight-line over a five-year period, with the first deduction starting in one year. c. Using MACRS depreciation with a five-year recovery period and starting immediately d. Fully as an immediate deduction a. Straight-line over a ten-year period, with the first deduction starting in one year. The present value of the depreciation tax shield associated with this equipment is $ 1.73 million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.) b. Straight-line over a five-year period, with the first deduction starting in one year. The present value of the depreciation tax shield associated with this equipment is $ 2.13 million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.) c. Using MACRS depreciation with a five-year recovery period and starting immediately The present value of the depreciation tax shield associated with this equipment is $ million. (Round the final answer to three decimal places. Round all intermediate values to four decimal places as needed.)

Answer 1

c]

Present value of depreciation tax shield is $2.291 million.

D4 fx =C4/(1+10%) A4 ДА В с D PV of Depreciation Depreciation 1 Year Depreciation tax shield tax shield 0 $1,520,000 $562,400 $562,400 1 $2,432,000 $899,840 $818,036 2 $1,459,200 $539,904 $446,202 3 $875,520 $323,942 $243,383 4 $875,520 $323,942 $221,257 Total $2,291,278 3 5 7

A B 1 Year 2 0 3 1 42 5 3 64 7 Total Depreciation =7600000*20% =7600000*32% =7600000*19.2% =7600000*11.52% =7600000*11.52% Depreciation tax shield =B2*37% =B3*37% =B4*37% =B5*37% =B6*37% PV of Depreciation tax shield =C2/(1+10%)^A2 =C3/(1+10%)^A3 =C4/(1+10%)^A4 =C5/(1+10%)^A5 =C6/(1+10%)^A6 =SUM(D2:06)

d]

Present value of depreciation tax shield = full cost of equipment * tax rate.

Present value of depreciation tax shield = $7.6 million * 35% = $2.660 million.

No discounting is required since the deduction is immediate.