A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?

Question

Quizplus · Accepted Answer

To calculate the current value of the benefit of depreciation, we need to calculate the present value of the $2,000.00 annual depreciation for the next four years. The formula to calculate present value is:

PV = FV / (1 + r)n

where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.

In this case, FV = $2,000.00, r = 10%, and n = 4. So, 
PV = $2,000.00 / (1 + 0.10)4 = $1,277.33

This means that the present value of the depreciation benefit over four years is $1,277.33. However, we also need to consider the tax savings from this depreciation.

The tax savings can be calculated as:

Tax savings = Depreciation * Tax rate

= $2,000.00 * 40% = $800.00

So, the total present value of the benefit of depreciation is:

Total PV = PV + Tax savings

= $1,277.33 + $800.00 = $2,077.33

Therefore, the current value of the benefit of depreciation is $2,077.33, which is closest to answer choice (C) $2,535.92.

A Piece of Machinery Can Be Further Depreciated $2,000