How much is the net present value of tax benefit

Assignment Help Managerial Accounting

Reference no: EM133342278

Case: Oriental Corporation has been offered a six-year contract to supply a special product to a special customer. Management has estimated the following data relative to the contract:

Cost of special equipment P 3,000,000

Working capital needed 400,000

Annual revenues from the contract 2,400,000

Annual out-of-pocket costs 1,430,000

Residual value of the equipment 120,000

The equipment with a useful life of 8 years would be sold at the end of the contract. Oriental's cost of capital is 8% and its tax rate is 30%.

Required:

1. Determine the net present value of the contract, if the company uses:

a. straight-line method of depreciation.

b. sum-of-years-digits method of depreciation.

2. How much is the net present value of tax benefit derived from using SYD method of depreciation as compared with the straight line method of depreciation?

Reference no: EM133342278

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