Determine the present value of the depreciation tax shield

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Question 1: Your firm is considering a project that would require purchasing $7.7 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).

Reference no: EM132525964

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