Rush Corporation plans to acquire production equipment for $615,000 that will be

Question

Rush Corporation plans to acquire production equipment for $615,000 that will be depreciated for tax purposes as follows: year 1, $123,000; year 2, $213,000; and in each of years 3 through 5, $93,000 per year. A 6 percent discount rate is appropriate for this asset, and the company’s tax rate is 40 percent. Use Exhibit A.8 and Exhibit A.9.

a. Compute the present value of the tax shield resulting from depreciation. (Round PV factor to 3 decimal places and other intermediate calculations t Present value of the tax shield b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($123,000 per year). (Round PV factor to 3 decimal calculations to nearest whole number.) to neateat whele umnoa Present value of the tax shield

Explanation / Answer

Requirement a: Year Depreciation Tax Shield PVF(6%) PV of Tax Shield 1 123000 49200 0.943396 46415.0943 2 213000 85200 0.889996 75827.6967 3 93000 37200 0.839619 31233.8373 4 93000 37200 0.792094 29465.8843 5 93000 37200 0.747258 27798.004 210740.517 Requirement b: Year Depreciation Tax Shield PVF(6%) PV of Tax Shield 1 123000 49200 0.943396 46415.0943 2 123000 49200 0.889996 43787.8248 3 123000 49200 0.839619 41309.2687 4 123000 49200 0.792094 38971.0082 5 123000 49200 0.747258 36765.1021 207248.298

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