Peter Pontificator is proposing to purchase a paddle machine,which will cost $1 million,last eight years and have a salvage value of20%.Given a tax rate of 35%,and a cost of capital of 6%: If double-declining balance depreciation is used,and PP switches to straight-line depreciation in year 6,the present value of the depreciation tax shield is:

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Quizplus · Accepted Answer

The double-declining balance depreciation rate is 20% x 2 = 40%. The straight-line depreciation rate is 100% / 8 = 12.5%. The present value of the depreciation tax shield is:PV = -1,000,000 + (1,000,000 x 0.40 x 0.35 x 4) + (1,000,000 x 0.125 x 0.35 x 3)= -1,000,000 + 560,000 + 143,750= $287,506

Peter Pontificator Is Proposing to Purchase a Paddle Machine,which