Homework Answers
Answer (a).
Depreciation tax shield = Depreciation * Tax Rate
|
Year |
Depreciation |
Tax Shield (Depreciation * Tax Rate) |
PV Factor @ 12% |
PV Of cash flow |
|
1 |
127000 |
50800 |
0.89286 |
45357.14 |
|
2 |
217000 |
86800 |
0.79719 |
69196.43 |
|
3 |
97000 |
38800 |
0.71178 |
27617.07 |
|
4 |
97000 |
38800 |
0.63552 |
24658.10 |
|
5 |
97000 |
38800 |
0.56743 |
22016.16 |
|
Total |
188844.91 |
The present value of the tax shield will be $188,844.91
Answer (b).
Annual depreciation using straight-line depreciating will be = $635,000/ 5 = $127,000
|
Year |
Depreciation |
Tax Shield (Depreciation * Tax Rate) |
PV Factor @ 12% |
PV Of cash flow |
|
1 |
127000 |
50800 |
0.89286 |
45357.14 |
|
2 |
127000 |
50800 |
0.79719 |
40497.45 |
|
3 |
127000 |
50800 |
0.71178 |
36158.44 |
|
4 |
127000 |
50800 |
0.63552 |
32284.32 |
|
5 |
127000 |
50800 |
0.56743 |
28825.28 |
|
Total |
183122.63 |
The present value of the tax shield will be $183122.63
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depreciation. Assume the new equipment would provide the following
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