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DEPRECIATION FROM TAX SHIELD S&S Corporation is making $65,600 investment in equ

ID: 2664336 • Letter: D

Question

DEPRECIATION FROM TAX SHIELD S&S Corporation is making $65,600 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40%. The company’s required rate of return is 12 percent.

What is the present value of the tax savings related to depreciation of equipment?

Round to 4 decimal places.


$______________________ DEPRECIATION FROM TAX SHIELD S&S Corporation is making $65,600 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40%. The company’s required rate of return is 12 percent.

What is the present value of the tax savings related to depreciation of equipment?

Round to 4 decimal places.


$______________________

Explanation / Answer

Tax shield on deprciation = Depreciation * Tax rate
here Depreciation = 65,600 / 5 [Since it is folloing Straight line method]
= $65,600 / 5
= $13120
And tax rate = 40%
There fore Tax shield = $13120*40%
=$5248

the present value of the 5 yeaRS tax saving would be :

PVIFA (r,n)=[ 1- 1/(1+r)^n] / r

= [ 1- 1/(1.12)^5] / 0.12

=3.604

= $5248*3.6047

= $18917.4656