Your Company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of 5 years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9%, and the firm's tax rate is 21%. Estimate the present value of the tax benefits from depreciation. Multiple ChoiceA. $294B. $1,106C. $1,400D. $1,144

Question
Asked Dec 9, 2019
31 views

Your Company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of 5 years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9%, and the firm's tax rate is 21%. Estimate the present value of the tax benefits from depreciation.

 

Multiple Choice

A. $294
B. $1,106
C. $1,400
D. $1,144
check_circle

Expert Answer

star
star
star
star
star
1 Rating
Step 1

Given that:
Cost of new equipment is $10,000
Salvage value $3,000
Useful life (depreciable life) is 5 years
With the given information we need to determine presennt value of the tax benefits from depreciation

 

Step 2
help_outline

Image Transcriptionclose

Annual depreciati on= (Cost of new equipment - Salvage value) - (Useful life) = (10000 - 3000) - (5) =1400

fullscreen
Step 3

So, the annual tax savings on de...

help_outline

Image Transcriptionclose

Tax rate=21% Tax savings on depreciati on=(Annual depreciati on) x (Tax rate) =1400x 21% =294

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Time Value

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: A person purchased a $134,359 home 10 years ago by paying 20% down and signing a 30-year mortgage at...

A: Value of the house = $134,359Down payment = 20%*134,359 = $ 26871.80Loan amount = $134,359 - $26,871...

question_answer

Q: Need questions 1-7 answered including 4 a,b,c,d,e,f Assuming that there is an unlevered firm and a l...

A: Hey, since there are multiple subparts questions posted, we will answer first three question. If you...

question_answer

Q: O 1 75% AT&T LTE 11:52 AM Exit 26 4. Conglomerate Inc. is trading at $80/share, and is about to anno...

A: Calculation of Maximum Exchange Ratio:The maximum exchange ratio is close to 1.43.Excel Spreadsheet:

question_answer

Q: Find the compound interest and compound amount for a loan of $5,000 at 6% compounded semiannually fo...

A: Given that the present value is $5000, interest rate is 6% and the time period is 2 years, with the ...

question_answer

Q: Compute the MIRR statistic for Project J if the appropriate cost of capital is 8 percent. (Do not ro...

A: Calculation of MIRR:The MIRR is 7.37%.Excel Spreadsheet:

question_answer

Q: Expected Return A company's current stock price is $86.30 and it is likely to pay a $5.30 dividend n...

A: The formula to compute expected return is as follows: 

question_answer

Q: You own a furniture manufacturing company. You are looking to expand into glass furniture and need t...

A: a)Calculation of ARR:The ARR for Machine 1 is 28.89% and Machine 2 is 32.73%. Thus, it is preferred ...

question_answer

Q: IVY has preferred stock selling for 97.6 percent of par that pays a 7.4 percent annual coupon. What ...

A: Calculation of Cost of Preferred Stock:The cost of preferred stock is 20.74%.Excel Spreadsheet:

question_answer

Q: A small firm has a line of credit that bears a rate of 8%. One quarter of the firm's total financing...

A: Calculate the weighted average cost of capital (WACC) as follows: