Question
Asked Nov 27, 2019
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Your company is considering a new project that will require $875,000 of new equipment at the start of the project. The equipment will have a depreciable life of 8 years and will be depreciated to a book value of $155,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 30 percent.

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Expert Answer

Step 1

It is assumed that the present value of tax benefits from the new projects is required to be calculated which help an investor to evaluate the project or investment.

Step 2

Given:

Initial cost of the new project = $875,000

Useful life is 8 years

Salvage or residual value is $155,000

The cost of capital is 11%

Tax rate is 30%

Step 3

Firstly, depreciation wi...

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Value for depreciation = Initial cost -Salvage value = $875,000-$155,000 =$720,000 Value for depreciation Depreciation for each year Total useful life $720,000 8 = $90, 000

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