A firm invests $10 million in a new stamping machine.It depreciates it straight line for tax purposes over 5 years.The tax rate is 30%,inflation is 4% a year,and the discount rate is 8%.What is the PV of the depreciation tax shield?
A) $600,000.
B) $2,395,626.
C) $2,579,497.
D) $3,000,000.

Question

Quizplus · Accepted Answer

Annual depreciation tax shield = 0.3 × $10 million / 5 =$600,000PV shield = $600,000{1 / 0.08 − 1 / (0.08 × 1.08⁵)] = $2,395,626

A Firm Invests $10 Million in a New Stamping Machine