What is the present worth of the depreciation tax held?

Question

Company A purchases $200,000 of equipment in year zero. It decides to use straight-line

depreciation over the expected 20 years life of the equipment. The interest rate is 14%. If its

average tax rate is 40%, what is the present worth of the depreciation tax held?

A. $3,500.00

B. $26,500.00

C. $39,700.00

D. $4,000.00

Answer 1

First divide the cost of the equipment by the years of life. The result is 10,000. Then multiply that by .4. The result is 4,000. This is the amount of the depreciation tax deduction for each year.

Now you need to use a financial calculator to calculate PV.

i=.14,n=20,pmt=4000,fv=0

PV =26,500

The answer is B.