Your Company is considering a new project that will require $100,000 of new equi

Question

Your Company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation. $13,607.52 $14,841.29 $15,017.54 $16,997.13 $13,607.52 $14,841.29 $15,017.54 $16,997.13 $13,607.52 $14,841.29 $15,017.54 $16,997.13

Explanation / Answer

Amount of yearly depreciation = ($100,000 - $25,000) / 10

= $75,000 / 10 years = $7,500 per year

Tax saved on depreciation amount every year = $7,500 x 34% = $2,550

Present value of depreciation tax benefits = $2,550 x Cumulative P.V. factor of 11% for 10 years

= $2,550 x 5.88923

= $15,017.54

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