Compute the present value of the depreciation tax benefit

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Question - Yankee Freight provides truck freight services throughout the northeast United States. The firm is considering an investment in improved logistics management requiring a mainframe computer and communications software, which would cost $1,000,000 and have an expected life for eight years. For tax purposes, the investment will be depreciated using the straight-line method, with no salvage value. The company's cost of capital and tax rate are 8 and 30 percent, respectively.

Required -

A. Compute the present value of the depreciation tax benefit.

B. Assume instead that Yankee Fright uses the double-declining-balance method of depreciation for tax purposes with a five-year life. Compute the present value of the depreciation tax benefit.

C. Why is the depreciation tax benefit computed in (B) larger than that computed in (A)?

Reference no: EM133156693

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