Galveston Excursons Corporation
Galveston Excursons Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin.The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years.At the end of 15 years,the ship will have no value and will be scuttled.Galveston Excursons' cost of capital is 14 percent,and its marginal tax rate is 35 percent.
Refer to Galveston Excursons Corporation.What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar. )Present value tables or a financial calculator are required.

Question

Quizplus · Accepted Answer

The present value of the depreciation tax benefit is the present value of the tax savings that will be generated by the depreciation of the new ship. The tax savings will be equal to the depreciation expense multiplied by the marginal tax rate. The depreciation expense will be $600,000 / 15 = $40,000 per year. The marginal tax rate is 35%. Therefore, the tax savings will be $40,000 * 0.35 = $14,000 per year. The present value of the tax savings can be calculated using the present value formula:PV = CF * (1 - (1 + r)^-n) / rwhere:PV is the present valueCF is the cash flowr is the discount raten is the number of yearsIn this case, the cash flow is $14,000, the discount rate is 14%, and the number of years is 15. Plugging these values into the formula, we get:PV = $14,000 * (1 - (1 + 0.14)^-15) / 0.14= $14,000 * (1 - 0.2472) / 0.14= $14,000 * 0.7528 / 0.14= $85,991Therefore, the present value of the depreciation tax benefit is $85,991.

Galveston Excursons Corporation Galveston Excursons Corporation Is Considering the Purchase of a New