A company has a cost of capital of 5% and a tax rate of 40%. The present value of the tax on an asset that has a recapture of $2 677 and a 10-year useful life is $657

Question

Quizplus · Accepted Answer

The present value of the tax can be calculated using the formula:
PV of tax = recapture amount x tax rate x present value factor
PV of tax = $2677 x 40% x present value factor for 10 years at 5%
Using a present value table, the present value factor for 10 years at 5% is 0.6139.
PV of tax = $2677 x 0.40 x 0.6139 = $657.48, which is approximately equal to $657. Therefore, the statement is true.

A Company Has a Cost of Capital of 5% and a Tax