Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14%, and the firm's tax rate is 30%. Estimate the present value of the tax benefits from depreciation.

Question

Quizplus · Accepted Answer

The annual depreciation expense is ($100,000 - $5,000) / 10 = $9,500.

The present value of the tax benefits from depreciation can be calculated using the following formula:

PV = (Depreciation expense x Tax rate) x (1 - Tax rate) x Present value factor

= ($9,500 x 0.30) x (1 - 0.30) x (1 / 1.14) x [1 - 1 / (1 + 0.14) ^ 10]

= $14,865.93

Therefore, the best choice is A, which is $14,865.93.

Your Company Is Considering a New Project That Will Require