Question

Problem 12-2 PV of Depreciation Tax Benefits (LG12-4) Your company is considering a new project that will require $955,000 million of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $154,000 using straight-line depreciation. Neither bonus depreciation nor Section 179 expensing will be used. The cost of capital is 12 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.) Present value

Answer 1

Calculation of Depreciation

(New Equipment Cost - Book Value) / useful life

= ($ 955,000 - $154,000) / 9

= $ 89,000

Calculation of tax savings each period

= $89,000 x .21

= $18690

Across the entire project, these savings will be for 9 years annuity. So, following excel worksheet shows the calculation of present value of tax benefits from depreciation:-

where, T C = 09 Cash flow Present worth/= value Citrin Lre interest rate + no no. of years 0

Book3 - Excel nitin arora - O X File Home Insert Page Layout Formulas Data Review View Help ? Tell me what you want to do Share of D Calibri D V 11 VA A = = = an ab Wrap Text Merge & Center, General 9 ,% Paste Ste B I U , I, A , v 9.00 Conditional Format as Cell Formatting Table Styles one Styles Insert Delete Format Σ AutoSum - Fill - Sort & Find & Clear Filter Select Editing Clipboards Font Alignment Number Cells N13 - X ✓ fix А Years D E F G H I J K L M N O P Q R A WNA om todo в Tax benefit Present value 18690 16687.50 18690 14899.55 18690 13303.17 18690 11877.83 18690 10605.21 18690 9468.94 18690 8454.41 18690 7548.58 18690 6739.80 00 O 12 99584.99 13 14 Total present value of tax benefit 20 21 Sheet1 • | 0 - + 100% Ready 1 0 Type here to search of Ô e 9 24.) F 01:23 19-04-2020 ENG E

The following is the Formula sheet of above excel worksheet:-

Book3 - Excel nitin arora - X File Home Insert Page Layout Formulas Data Review View Help ? Tell me what you want to do 2 Share fx * A Calculate Now Insert Function AutoSum Recently Financial Logical Text Date & Lookup & Math & More Used - Time - Reference Trig. Functions Function Library Name Manager 3 Define Name For Use in Formula Create from Selection Defined Names - Trace Precedents Show Formulas Trace Dependents Error Checking Remove Arrows - Evaluate Formula Formula Auditing Watch Window Calculation Calculate Sheet Options Calculation F9 X V foc G H I Years Tax benefit 1 21 32 4 3 54 6 5 7 6 8 7 98 10 9 18690 18690 18690 18690 18690 18690 18690 Present value =B2/(1+0.12)^A2 =B3/(1+0.12)^A3 =B4/(1+0.12)^A4 =B5/(1+0.12)^A5 =B6/(1+0.12)^A6 =B7/(1+0.12)^AZ =B8/(1+0.12)^A8 =B9/(1+0.12)^A9 =B10/(1+0.12)^A10 18690 18690 13 =SUM(C2:C11) Total present value of tax benefit 20 21 Sheet1 € @ J - + 100% Ready 1 0 Type here to search o Ae 9 21.01» T 01:23 19-04-2020 ENG

So, the present value of tax benefits from depreciation :- $ 99584.99