The present discounted value of the tax deduction

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Reference no: EM132070995

Suppose that under straight-line depreciation, a corporation would be allowed to depreciate a $10,000 asset over 4 years. Under accelerated depreciation, the corporation would be allowed to depreciate 75% of the asset's value immediately in the first year and the remaining 25% in the second year. Assume that the discount rate is 10%.

(a) Suppose that the corporation normally makes $56,000 of annual profit on which it pays a 35% tax every year. What is the present discounted value of the tax deduction under accelerated depreciation

(b) Show graphically and explain the impact on a firm’s investment of accelerated depreciation (as opposed to straight-line depreciation) that is show whether it will invest more or less with accelerated depreciation.

Reference no: EM132070995

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