Problem

Depreciation Tax Shield An investment project involves the purchase of equipment at a c...

Depreciation Tax Shield

An investment project involves the purchase of equipment at a cost of $100 million. For tax purposes, the equipment has a life of five years and will be depreciated on a straight-line basis. Inflation is expected to be 5 percent and the real interest rate is 5 percent. The tax rate is 40 percent. What is the present value of the depreciation tax shield for the machine?

SOURCE: R. Watts.

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Solutions For Problems in Chapter 3