Your firm is considering a project that would require purchasing $7.8 million wo
ID: 2773824 • Letter: Y
Question
Your firm is considering a project that would require purchasing $7.8 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 36%, the appropriate cost of capital is 7%, and the equipment can be depreciated:
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 ?million.
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 ?million.
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.
d. Fully as an immediate deduction.
The present value of the depreciation tax shield is ? million
Explanation / Answer
Answer:-
A.Cost of capital= 7%
No.of years= 10
Cost of new equipment(FV)= $78,000,000 *(1-.36)million= $ 49,920,000
Depreciation using SLM= $ 49,920,000/10= $ 4,992,000
= 4,992,000*(1+.10)^-10=$ 35,061,719.05 million
B.
Cost of capital= 7%
No.of years= 5
Cost of new equipment(FV)= $78,000,000 *(1-.36)million= $ 49,920,000
Depreciation using SLM= $ 49,920,000/5= $ 9,984,000
= 9,984,000*(1+.07)^-5=$ 40,936,371.20 million
c. Cost*1/useful life*A*depreciation Convention
PV= $ 16,767,537.64
d. Cost of new equipment(FV)= $78,000,000 *(1-.36)million= $ 49,920,000
PV= $49,920,000
Cost 49,920,000 1st year 9,984,000.00 2nd Year 7987200 3rd Year 6,389,760.00 4th Year 5,111,808.00 5th Year 4,089,446.40Related Questions
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