Use the following to answer questions:
Exron Corp. is considering the purchase of a new machine costing $300,000. The new machine will expand Exron's sales capacity and provide $90,000 in additional cash flows (before taxes) over the next five years. The company has decided to depreciate the machine using the straight-line method and no salvage value. At the end of the five years, Exron expects to sell the machine for $20,000.
Exron has a 40% tax rate and uses a 10% discount rate to evaluate the purchase of new machines.

-What is the present value of the machine's depreciation tax shield?

Question

Use the following to answer questions:
Exron Corp. is considering the purchase of a new machine costing $300,000. The new machine will expand Exron's sales capacity and provide $90,000 in additional cash flows (before taxes) over the next five years. The company has decided to depreciate the machine using the straight-line method and no salvage value. At the end of the five years, Exron expects to sell the machine for $20,000.
Exron has a 40% tax rate and uses a 10% discount rate to evaluate the purchase of new machines.
 
-What is the present value of the machine's depreciation tax shield?

Quizplus · Accepted Answer

The present value of the depreciation tax shield is calculated by multiplying the depreciation expense by the tax rate and then discounting it back to the present value. The correct calculation results in $90,984.

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