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Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993 Exercise 10
Present Value of Cash Flows
Rush Corporation plans to acquire production equipment for $600,000 that will be depreciated for tax purposes as follows: year 1, $120,000; year 2, $210,000; and in each of years 3 through 5, $90,000 per year. An 18 percent discount rate is appropriate for this asset, and the company's tax rate is 40 percent.
Required
a. Compute the present value of the tax shield resulting from depreciation.
b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year).
Rush Corporation plans to acquire production equipment for $600,000 that will be depreciated for tax purposes as follows: year 1, $120,000; year 2, $210,000; and in each of years 3 through 5, $90,000 per year. An 18 percent discount rate is appropriate for this asset, and the company's tax rate is 40 percent.
Required
a. Compute the present value of the tax shield resulting from depreciation.
b. Compute the present value of the tax shield from depreciation assuming straight-line depreciation ($120,000 per year).
Explanation
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(a)Tax shield from depreciation
The tax...
Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
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