Suppose that you are able to generate an annual depreciation deduction of $20,000 that would otherwise have been taxed at a 30% rate each year for 7 years. Suppose that your taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated. Determine the net benefit of depreciation assuming a discount rate of 6.5%.
A. $12,315
B. $20,592
C. $32,907
D. $53,499
Ans: A
Please show how to get the answer $12,315. Preferably using financial calculator (not excel).
Tax Saving on Depreciation = $20,000 * 30%
= $6,000
Present Value Interest Factor of Annuity (PVIFA) =
=
= 0.5539 / 0.1010
= 5.4845
PVIFA of Tax Savings on Depreciation = 5.4845 * $6,000
= $32,907
Present Value Interest Factor (PVIF) of 7th Year =
=
= 0.6435
PVIF of taxes due on sale in year 7 will be $32,000 greater than if the property had not been depreciated
= $32,000 * 0.6435
= $20,592
(R is the discount rate and T is the time period in both the formula used above)
Therefore, the net benefit of depreciation = $32,907 - $20,592
= $12,315
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