Samsonite Company will purchase a van for $40,000. The van\'s depreciable life i

Question

Samsonite Company will purchase a van for $40,000. The van's depreciable life is 5 years. The van has no terminal salvage value. Assume a tax rate of 30% and a required after-tax rate of return of 12%. The company uses the straight-line method of depreciation for tax purposes. What is the present value of the total after-tax savings from the depreciation over the life of the new van? (The present value of an ordinary annuity factor for 5 periods at 12% is 3.6048. The present value of a single sum for 5 periods at 12% is 0.5674.) A) $8,652 B) $24,000 C) $17,303 D) $16,000

Explanation / Answer

Solution:

Cost of VAN = $40,000

Life = 5 Years

Salvage value = Nil

Annual depreciation = ($40,000 - 0)/5 = $8,000

Tax saving on depreciation = $8,000 * 30% = $2,400

Present value of tax saving on depreciation = $2,400 * cumulative PV factor at 12% for 5 periods

= $2,400 * 3.6048 = $8,652

Hence option A is correct.

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