Lee & Company has purchased equipment for $200,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select either of the following depreciation schedules for tax purposes: Option 1 Option 2 Year Depreciation Depreciation 1 $40,000 $20,000 2 64,000 40,000 3 38,400 40,000 4 23,040 40,000 5 23,040 40,000 6 11,520 20,000 Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields. Round answers to the nearest whole number. Use rounded answers to calculate total.
Lee & Company has purchased equipment for $200,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select either of the following depreciation schedules for tax purposes: Option 1 Option 2 Year Depreciation Depreciation 1 $40,000 $20,000 2 64,000 40,000 3 38,400 40,000 4 23,040 40,000 5 23,040 40,000 6 11,520 20,000 Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields. Round answers to the nearest whole number. Use rounded answers to calculate total.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
100%
Depreciation Tax Shields
Lee & Company has purchased equipment for $200,000. After it is fully
| Option 1 | Option 2 | |
|---|---|---|
| Year | Depreciation | Depreciation |
| 1 | $40,000 | $20,000 |
| 2 | 64,000 | 40,000 |
| 3 | 38,400 | 40,000 |
| 4 | 23,040 | 40,000 |
| 5 | 23,040 | 40,000 |
| 6 | 11,520 | 20,000 |
Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields.
Round answers to the nearest whole number. Use rounded answers to calculate total.
Option 1 depreciation:
| Year (N) |
Tax Savings (FV) |
Present Value |
|---|---|---|
| 1 | Answer
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Answer
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| 2 | Answer
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| 3 | Answer
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| 4 | Answer
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| 5 | Answer
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| 6 | Answer
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Option 2 depreciation:
| Year (N) | Tax Savings (FV) | Present Value |
|---|---|---|
| 1 | Answer
|
Answer
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| 2 | Answer
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| 3 | Answer
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| 4 | Answer
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| 5 | Answer
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| 6 | Answer
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Answer
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| Answer
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