Suppose a corporation purchases an asset for $100,000.Under straight-line depreciation,the corporation would be allowed to depreciate the asset over 5 years.Under accelerated straight-line depreciation,it would be allowed to depreciate the asset over 2 years.Now assume that the discount rate is 10%.What would the present discounted value of the tax deduction be under straight-line depreciation?

Question

Quizplus · Accepted Answer

To calculate the present discounted value of the tax deduction under straight-line depreciation, we can use the formula:

PV = (D x (1 - (1 + r)^-n)) / r

Where PV is the present value of the tax deduction, D is the annual tax deduction, r is the discount rate, and n is the number of years.

For straight-line depreciation, the annual tax deduction would be $100,000 / 5 = $20,000 per year.

Using the formula with r = 10%, n = 5 years, and D = $20,000, we get:

PV = (20,000 x (1 - (1 + 0.1)^-5)) / 0.1

PV = $83,397.31

Therefore, choice A is the correct answer.

Suppose a Corporation Purchases an Asset for $100,000