Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 12

Present Value of Cash Flows

Rush Corporation plans to acquire production equipment for $600,000 that will be depreciated for tax purposes as follows: year 1, $120,000; year 2, $210,000; and in each of years 3 through 5, $90,000 per year. An 8 percent discount rate is appropriate for this asset, and the company’s tax rate is 40 percent.

Required

a. Compute the present value of the tax shield resulting from depreciation.

b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year).

Step 1 of 7

Capital budgeting

Capital budgeting is the process used by the company to evaluate the capital investment that are available. The company uses various capital budgeting methods to evaluate whether the company should invest in the particular project that is whether the project is profitable for the company.