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 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $10,406
B) $14,031
C) $15,017
D) $39,147

Question

Quizplus · Accepted Answer

The present value of the tax benefits from depreciation is calculated as follows:PV = (Depreciation expense * Tax rate) / Cost of capitalPV = ($100,000 / 10 * 0.21) / 0.14PV = $14,031

Your Company Is Considering a New Project That Will Require