Peter Pontificator is proposing to purchase a paddle machine, which will cost $1 million, last eight years and have a salvage value of 20%. Given a tax rate of 35%, and a cost of capital of 6%: If double-declining balance depreciation is used, and PP switches to straight-line depreciation in year 6, the present value of the depreciation tax shield is:

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Quizplus · Accepted Answer

The present value of the depreciation tax shield is $287,506. This is calculated by taking the present value of the tax savings from depreciation over the eight-year life of the asset. The tax savings from depreciation are calculated by multiplying the depreciation expense by the tax rate. The depreciation expense is calculated using the double-declining balance method for the first five years and the straight-line method for the remaining three years. The present value of the tax savings is calculated using a discount rate of 6%.

Peter Pontificator Is Proposing to Purchase a Paddle Machine, Which