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Estimate present value of tax benefits from depreciation

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1. Your Company is considering a new project that will require $11,000 of new equipment at the start of the project. The equipment will have a depreciable life of 6 years and will be depreciated to a book value of $2,000 using straight-line depreciation. The cost of capital is 8%, and the firm's tax rate is 30%. Estimate the present value of the tax benefits from depreciation.

2. Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.

Time: ?? 0. ?1? 2? 3

Project A

Cash flow : -33,000 23,000 43,000 14,000

Project B

Cash Flow: -43,000 23,000 33,000 63,000

Use the discounted payback decision rule to evaluate these projects; which one(s) should it be accepted or rejected?

Reference no: EM132685197

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