Present Value of Depreciation Tax Shield under Inflation: Refer to the data in exercise 15-20. 

Required:

a. Using the accelerated tax depreciation deductions in exercise 15-20, what is the present value of the tax shield if the inflation rate is 8 percent and the no-inflation discount rate is 22 percent?

b. What is the present value of the tax shield if the inflation rate is 14 percent and the no-inflation discount rate is 22 percent?

c. What happens to the net present value of the tax shield as the inflation rate increases?

Transcribed Image Text:

Year Depreciation Tax Shield at % Present Value Factor Present Value 12345 Totals Net present value of tax shield: Refer to Illustration 15-12 above to compute the present value of depreciation tax shields.