Joshua Company will purchase a van for $40,000.It will have a depreciable life of 5 years and no terminal salvage value.Assume a tax rate of 20% and a required after-tax rate of return of 12%.The company uses straight-line depreciation for tax purposes.What is the present value of the after-tax savings from depreciation expense in year 1? (The present value of a single sum for one period at 12% is 0.8929.)

Question

Quizplus · Accepted Answer

The yearly depreciation expense will be $40,000/5 = $8,000. 
The tax savings from depreciation expense in year 1 will be 20% of $8,000 = $1,600. 
The after-tax savings will be $1,600*(1-0.2) = $1,280. 
The present value of $1,280 at 12% for one year is $1,280*0.8929 = $1,143.64. 
Therefore, the present value of the after-tax savings from depreciation expense in year 1 is $1,428.64.

Joshua Company Will Purchase a Van for $40,000