Question

Your company is considering a new project that will require $875,000 million 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.

Estimate the present value of the tax benefits from depreciation

Answer 1

CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD
Purchase Cost	8,75,000
Less: Residual Value	1,55,000
Net Value for Depreciation	7,20,000
Useful life of the Assets	8 years
Depreciation per year = Value for Depreciation / 8 years =	90,000
Total Depreciation Per year =	90,000
CALCULATION OF NET PRESENT VALUE OF TAX SAVING
Year	Depreciation Expenses	Tax Saving @ 30%	PVF of $ 1 @ 11%	Present Value
Depreciation for Year 1	$                      90,000	$                    27,000	0.90090	$                     24,324.32
Depreciation for Year 2	$                      90,000	$                    27,000	0.81162	$                     21,913.81
Depreciation for Year 3	$                      90,000	$                    27,000	0.73119	$                     19,742.17
Depreciation for Year 4	$                      90,000	$                    27,000	0.65873	$                     17,785.74
Depreciation for Year 5	$                      90,000	$                    27,000	0.59345	$                     16,023.19
Depreciation for Year 6	$                      90,000	$                    27,000	0.53464	$                     14,435.30
Depreciation for Year 7	$                      90,000	$                    27,000	0.48166	$                     13,004.78
Depreciation for Year 8	$                      90,000	$                    27,000	0.43393	$                     11,716.02
		Total		$                  1,38,945.31
Answer = Present Value of Tax Saving on Depreciation = $ 138,945.31