Question

Your company is considering a new project that will require $978,000 million 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 $148,000 using straight-line depreciation. Neither bonus depreciation nor Section 179 expensing will be used. The cost of capital is 13 percent, and the firm’s tax rate is 21 percent.

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

Answer 1

Cost of Equipment = $978,000
Salvage Value = $148,000
Useful Life = 10 years

Annual Depreciation = (Cost of Equipment - Salvage Value) / Useful Life
Annual Depreciation = ($978,000 - $148,000) / 10
Annual Depreciation = $830,000 / 10
Annual Depreciation = $83,000

Annual Depreciation Tax Shield = Annual Depreciation * Tax Rate
Annual Depreciation Tax Shield = $83,000 * 0.21
Annual Depreciation Tax Shield = $17,430

Present Value of Tax Benefits from Depreciation = Annual Depreciation Tax Shield * PVA of $1 (i%, n)
Present Value of Tax Benefits from Depreciation = $17,430 * PVA of $1 (13%, 10)
Present Value of Tax Benefits from Depreciation = $17,430 * 5.42624
Present Value of Tax Benefits from Depreciation = $94,579.36