Question

Depreciation Tax Shields
Lincoln Company has purchased equipment for $200,000. 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	$40,000	$20,000
2	64,000	40,000
3	38,400	40,000
4	23,040	40,000
5	23,040	40,000
6	11,520	20,000

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

Answer 1

Option 1 will be more attractive because the present value of the tax shield on depreciation is more for the option 1