Majestic Cruises Corporation Majestic Cruises Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Majestic Cruises' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Majestic Cruises Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.)Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

The present value of the depreciation tax benefit is $85,991. This is calculated as follows:Depreciation expense per year = $600,000 / 15 = $40,000Tax savings per year = $40,000 * 35% = $14,000Present value of tax savings = $14,000 * (1 - 1 / (1 + 14%)^15) / 14% = $85,991

Majestic Cruises Corporation Majestic Cruises Corporation Is Considering the Purchase