Royal Pacific Corporation Royal Pacific 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 $500,000 and would be fully depreciated by the straight-line method over 10 years.At the end of 10 years,the ship will have no value and will be scuttled.Royal Pacific's cost of capital is 12 percent,and its marginal tax rate is 40 percent.
Refer to Royal Pacific 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 $113,004. This is calculated as follows:PV = (Depreciation x Tax rate) / (1 + r)^nPV = ($500,000 / 10 x 0.40) / (1 + 0.12)^10PV = $113,004

Royal Pacific Corporation Royal Pacific Corporation Is Considering the Purchase