Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for 7 years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the net benefit of depreciation assuming a discount rate of 6.5%.

Question

Quizplus · Accepted Answer

The net benefit of depreciation is the present value of the tax savings from depreciation minus the present value of the additional taxes due on sale. The tax savings from depreciation are $20,000 x 30% = $6,000 per year for 7 years. The present value of these tax savings is $6,000 x (1 - 1/(1+0.065)^7)/0.065 = $32,907. The additional taxes due on sale are $32,000. The present value of these additional taxes is $32,000/(1+0.065)^7 = $20,592. Therefore, the net benefit of depreciation is $32,907 - $20,592 = $12,315.

Suppose That You Are Able to Generate an Annual Depreciation