Keyser Mining is considering a project that will require the purchase of $875,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the seven-year life of the project after which it will be worthless. The required return is 13 percent and the tax rate is 34 percent. What is the value of the depreciation tax shield in year 4 of the project?

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.