Depreciation Tax Shields Lincoln Company has purchased equipment for $400,000. A
ID: 2565009 • Letter: D
Question
Depreciation Tax Shields Lincoln Company has purchased equipment for $400,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select elther of the following depreciation schedules for tax purposes Option 1 Option 2 Year Depreciation Depree $80,000 128,000 76,800 46,080 46,080 23,040 $40,000 80,000 80,000 80,000 80,000 40,000 Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields Round answers to the nearest whole number. Use rounded answers to calculate total. Option 1 depreciation Year (N) Tax Savings (FV) Present ValueExplanation / Answer
Option 1. Year Dep. Tax Saving PV Annuity - 12% Present Value A B = A X 40% C D = B X C 1 80,000 32,000 0.8929 28,573 2 128,000 51,200 0.7972 40,817 3 76,800 30,720 0.7118 21,866 4 46,080 18,432 0.6355 11,714 5 46,080 18,432 0.5674 10,458 6 23,040 9,216 0.5066 4,669 Total Present Value 118,097 Option 2. Year Dep. Tax Saving PV Annuity - 12% Present Value A B = A X 40% C D = B X C 1 40,000 16,000 0.8929 14,286 2 80,000 32,000 0.7972 25,510 3 80,000 32,000 0.7118 22,778 4 80,000 32,000 0.6355 20,336 5 80,000 32,000 0.5674 18,157 6 40,000 16,000 0.5066 8,106 Total Present Value 109,173 Option 1 - Depreciation Schedule is more attractive to Licon.
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