A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?

A) $546.40
B) $6,339.80
C) $2,535.92
D) $3,803.88

Question

jaylon burrell · Accepted Answer

Final Answer : C, Explanation :  To calculate the current value of the benefit of depreciation, we need to calculate the present value of the $2,000.00 annual depreciation for the next four years. The formula to calculate present value is:PV = FV / (1 + r)nwhere PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.In this case, FV = $2,000.00, r = 10%, and n = 4. So,PV = $2,000.00 / (1 + 0.10)4 = $1,277.33This means that the present value of the depreciation benefit over four years is $1,277.33. However, we also need to consider the tax savings from this depreciation.The tax savings can be calculated as:Tax savings = Depreciation * Tax rate= $2,000.00 * 40% = $800.00So, the total present value of the benefit of depreciation is:Total PV = PV + Tax savings= $1,277.33 + $800.00 = $2,077.33Therefore, the current value of the benefit of depreciation is $2,077.33, which is closest to answer choice (C) $2,535.92.

A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?

A) $546.40
B) $6,339.80
C) $2,535.92
D) $3,803.88

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A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?A) $546.40B) $6,339.80C) $2,535.92D) $3,803.88

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Learning Objectives

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Related questions

A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?

A) $546.40
B) $6,339.80
C) $2,535.92
D) $3,803.88