Exhibit 9-1
A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues.
-Refer to Exhibit 9-1.Assume the tax rate is 40%,and the cost of capital is 10%.What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?

Question

Quizplus · Accepted Answer

Cash flow from year 1 to year 5 is the same. 11ea7eff_73da_f11f_92e1_a56f8dd25b25_TB3891_00 PV of cash flows (y1-y5)= 2.84/1.1 + 2.84/1.1² + 2.84/1.1³+ 2.84/1.1⁴ + 2.84/1.1⁵= 10.77m PV of depreciation tax savings (y1-y5)= 0.8/1.1 + .8/1.1² + .8/1.1³+ .8/1.1⁴ + .8/1.1⁵= 3.03m 3.03/10.77 = 28%

Exhibit 9-1 A Project Requires an Initial Investment in Equipment and Machinery