Suppose that Sudbury Mechanical Drifters is proposing to invest $10.8 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 35%, and the discount rate is 10%. a. What is the present value of Sudbury's depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Straight-line Schedule $ 10.8 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ $ 1.1 Straight-line, 10-year $ 1.1 1.1 $ 0.4 $ 0.4 $ 0.4 0.4 $ $ 0.4 0.4 $ 0.4 $ $ $ 0.4 $ 0.4 0.4 Tax Shields at 35% Tc PV (Tax Shields) at 10% b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Double decline Schedule $ 9.7 $ 10.8 Start of Year Book Value Depreciation Tax Shields at 35% Tc PV (Tax Shields) at 10% EA EA

Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 18E
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Suppose that Sudbury Mechanical Drifters is proposing to invest $10.8 million in a new factory. It can depreciate this investment
straight-line over 10 years. The tax rate is 35%, and the discount rate is 10%.
a. What is the present value of Sudbury's depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.)
Total
Year 10
Year 9
Year 8
Year 7
Year 6
Year 5
Year 4
Year 3
Year 2
Year 1
Straight-line Schedule
$ 10.8
$
1.1
$
1.1
$
1.1
$
1.1
$
1.1
$
1.1
$
1.1
$
$
1.1
Straight-line, 10-year
$
1.1
1.1
$
0.4
$
0.4 $
0.4
0.4
$
$
0.4
0.4 $
0.4
$
$
$
0.4
$
0.4
0.4
Tax Shields at 35% Tc
PV (Tax Shields) at 10%
b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point
to straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimal
place.)
Total
Year 10
Year 9
Year 8
Year 7
Year 6
Year 5
Year 4
Year 3
Year 2
Year 1
Double decline Schedule
$
9.7
$
10.8
Start of Year Book Value
Depreciation
Tax Shields at 35% Tc
PV (Tax Shields) at 10%
EA
EA
Transcribed Image Text:Suppose that Sudbury Mechanical Drifters is proposing to invest $10.8 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 35%, and the discount rate is 10%. a. What is the present value of Sudbury's depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Straight-line Schedule $ 10.8 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ $ 1.1 Straight-line, 10-year $ 1.1 1.1 $ 0.4 $ 0.4 $ 0.4 0.4 $ $ 0.4 0.4 $ 0.4 $ $ $ 0.4 $ 0.4 0.4 Tax Shields at 35% Tc PV (Tax Shields) at 10% b. Suppose that the government allows companies to use double-declining-balance depreciation with the option to switch at any point to straight-line. Now what is the present value of the depreciation tax shields? (Enter your answers in millions rounded to 1 decimal place.) Total Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Double decline Schedule $ 9.7 $ 10.8 Start of Year Book Value Depreciation Tax Shields at 35% Tc PV (Tax Shields) at 10% EA EA
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