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Your Company is considering a new project that will require $100,000 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 $5,000 using straight-line depreciation. The cost of capital is 14%, and the firm's tax rate is 30%. Estimate the present value of the tax benefits from depreciation.

Answer :

Abiolataiwo2015go

Answer:

14865.93

Explanation:

Calculation to Estimate the present value of the tax benefits from depreciation.

First step is to calculate the Annual depreciation expense

Annual depreciation expense = [100000 - 5000]/10

Annual depreciation expense = 9500

Second step is to calculate the Tax benefit

Tax benefit = 9500(.30)

Tax benefit = 2850

Now let calculate the PV of tax benefit

Using financial calculator

PMT = 2850

FV = 0

N = 10

i = 14

PV=?

Hence

PV = 14865.93

Therefore the present value of the tax benefits from depreciation is 14865.93

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