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A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year lif

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The Question

A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value. What is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?

Year 1

 

Depreciation

 

Tax rate

 

Tax shield 10000

 

35%

 

3500 PV of tax shiel $13,267.75 Year 2

 

Year 3

 

Year 4

 

Year 5

 

10000

 

10000

 

10000

 

10000

 

35%

 

35%

 

35%

 

35%

 

3500

 

3500

 

3500

 

3500

 

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DATE ANSWERED

Oct 14, 2020

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