Your company is considering a new project that will require $2,000,000 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 $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 39 percent. Estimate the present value of the tax benefits from depreciation.

Question

Quizplus · Accepted Answer

The annual depreciation expense is:

($2,000,000 - $250,000) / 10 = $175,000

The tax benefit of the depreciation is:

$175,000 x 0.39 = $68,250

Using the formula for the present value of an annuity, the present value of the tax benefits of depreciation is:

PV = $68,250 x (1 - (1 / (1 + 0.12) ^ 10)) / 0.12 = $385,628

Your Company Is Considering a New Project That Will Require