Your company is considering a new project that will require $875,000 million of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $155,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 30 percent.
Estimate the present value of the tax benefits from depreciation
CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD | |||||
Purchase Cost | 8,75,000 | ||||
Less: Residual Value | 1,55,000 | ||||
Net Value for Depreciation | 7,20,000 | ||||
Useful life of the Assets | 8 years | ||||
Depreciation per year = Value for Depreciation / 8 years = | 90,000 | ||||
Total Depreciation Per year = | 90,000 | ||||
CALCULATION OF NET PRESENT VALUE OF TAX SAVING | |||||
Year | Depreciation Expenses | Tax Saving @ 30% | PVF of $ 1 @ 11% | Present Value | |
Depreciation for Year 1 | $ 90,000 | $ 27,000 | 0.90090 | $ 24,324.32 | |
Depreciation for Year 2 | $ 90,000 | $ 27,000 | 0.81162 | $ 21,913.81 | |
Depreciation for Year 3 | $ 90,000 | $ 27,000 | 0.73119 | $ 19,742.17 | |
Depreciation for Year 4 | $ 90,000 | $ 27,000 | 0.65873 | $ 17,785.74 | |
Depreciation for Year 5 | $ 90,000 | $ 27,000 | 0.59345 | $ 16,023.19 | |
Depreciation for Year 6 | $ 90,000 | $ 27,000 | 0.53464 | $ 14,435.30 | |
Depreciation for Year 7 | $ 90,000 | $ 27,000 | 0.48166 | $ 13,004.78 | |
Depreciation for Year 8 | $ 90,000 | $ 27,000 | 0.43393 | $ 11,716.02 | |
Total | $ 1,38,945.31 | ||||
Answer = Present Value of Tax Saving on Depreciation = $ 138,945.31 | |||||
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