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 percent, and the firm's tax rate is 30 percent. 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 tax shield per year is $9,500 * 30% = $2,850. The present value of these tax shields is calculated using the formula for the present value of an annuity: $2,850 * [(1 - (1 + 0.14)^-10) / 0.14] = $14,865.93.

Your Company Is Considering a New Project That Will Require