Question

Depreciation Tax Shields
Lincoln Company has purchased equipment for $500,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select either of the following depreciation schedules for tax purposes:

	Option 1	Option 2
Year	Depreciation	Depreciation
1	$100,000	$50,000
2	160,000	100,000
3	96,000	100,000
4	57,600	100,000
5	57,600	100,000
6	28,800	50,000

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 Value
1	Answer	Answer
2	Answer	Answer
3	Answer	Answer
4	Answer	Answer
5	Answer	Answer
6	Answer	Answer
		Answer

Option 2 depreciation:

Year (N)	Tax Savings (FV)	Present Value
1	Answer	Answer
2	Answer	Answer
3	Answer	Answer
4	Answer	Answer
5	Answer	Answer
6	Answer	Answer
		Answer

Which depreciation schedule would be more attractive to Lincoln?
AnswerOption 1Option 2

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Answer 1

Option 1
Year	Depreciation	Tax savings	PV factor	Present value
1	$100,000.00	$40,000.00	0.89286	$35,714
2	$160,000.00	$64,000.00	0.79719	$51,020
3	$96,000.00	$38,400.00	0.71178	$27,332
4	$57,600.00	$23,040.00	0.63552	$14,642
5	$57,600.00	$23,040.00	0.56743	$13,074
6	$28,800.00	$11,520.00	0.50663	$5,836
Total				$147,619
Option 2
Year	Depreciation	Tax savings	PV factor	Present value
1	$50,000.00	$20,000.00	0.89286	$17,857
2	$100,000.00	$40,000.00	0.79719	$31,888
3	$100,000.00	$40,000.00	0.71178	$28,471
4	$100,000.00	$40,000.00	0.63552	$25,421
5	$100,000.00	$40,000.00	0.56743	$22,697
6	$50,000.00	$20,000.00	0.50663	$10,133
Total				$136,467

Option 1 would be more attractive to Lincoln