Your company is considering a new project that will require $825,000 of new equi

Question

Your company is considering a new project that will require $825,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $141,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm’s tax rate is 35 percent.

Estimate the present value of the tax benefits from depreciation. (Round your answer to 2 decimal places.)

Your company is considering a new project that will require $825,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $141,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm’s tax rate is 35 percent.

Explanation / Answer

Calculation of amount of Depreciation:

Depreciation = Cost - Salvage Value / Life in Years

Depreciation = 825,000 - 141,000 / 9 = $76,000

Tax Rate = 35%

Value of Tax Benefit = 76,000 x 35% = $26,600

Present Value of Tax benefit = Payment / Interest [1 - 1 / (1 + Interest)^n]

Present Value = 26,600 / 0.12 [1 - 1 / (1 + 0.12)^9]

Present Value = 26,600 / 0.12 [1 - 1 / 2.77307876]

Present Value = $141,731.44

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