A-13 Present Value of Cash Flows

Rush Corporation plans to acquire production equipment for $635,000 that will be depreciated for tax purposes as follows: year 1, $127,000; year 2, $217,000; and in each of years 3 through 5, $97,000 per year. A 12 percent discount rate is appropriate for this asset, and the companys tax rate is 40 percent. Use Exhibit A.8 and Exhibit A.9.

Required:

a. Compute the present value of the tax shield resulting from depreciation. (Round PV factor to 3 decimal places and other intermediate calculations to nearest whole number.)

b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($127,000 per year). (Round PV factor to 3 decimal places and other intermediate calculations to nearest whole number.)