Paper Company has a tax rate of 40% and a required rate of return of 10%.Depreciation expense relating to operating equipment is $80,000 per year.The asset has a five year life.The present value of one for five years at 10% is 0.6209.The present value of an ordinary annuity of one for five years at 10% is 3.7908.What is the present value of the after-tax cash flows from the annual depreciation expense over the life of the equipment?

Question

Quizplus · Accepted Answer

The after-tax cash flow from depreciation is the tax shield, which is the depreciation expense multiplied by the tax rate. The annual tax shield is $80,000 * 40% = $32,000. The present value of these cash flows is $32,000 * 3.7908 = $121,306.

Paper Company Has a Tax Rate of 40% and a Required