Question
Your firm is considering a project that would require purchasing $ 7.4 million worth of new equipment. Determine the present value of the depreciation tax
Your firm is considering a project that would require purchasing $ 7.4 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 20 % using the alternative depreciation methods below. Note that because the depreciation tax shield is essentially a riskless cash flow (assuming the firm's tax rate remains constant), the appropriate cost of capital to evaluate the benefit from accelerated depreciation is the risk-free rate; assume this rate is 9 % for all maturities.
a. Straight-line over a 10-year period, with the first deduction starting in one year.
b. Straight-line over a five-year period, with the first deduction starting in one year.
c. Using MACRS depreciation with a five-year recovery period and starting immediately.
d. 100% bonus depreciation (all the depreciation expense occurs when the asset is put into use, in this case immediately).
please answer and explanation with excel
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