A $100,000 piece of testing equipment was installed and depreciated for 5 years. Each year the end-of-year book value decreased at a rate of 10% of the book value at the beginning of the year. The system was sold for $24,000 at the end of 5 years.
a) Compute the amount of the annual depreciation.
Annual depreciation= Depreciation rate*Book value
Year 1 = 100000*10%= $10000
Year 2= 90000*10%=$9000
Year 3= 81000*10%=$8100
Year 4= 72900*10%=$7290
Year 5= 65610*10%=$6561
1) Year 1-Book value=$100000
2) Year 2-Book value=$100000-10000=$90000
3) Year 3-Book ...
This explains the steps to compute Annual depreciation.
Calculate the WACC, NPV, IRR and PV of depreciation tax shields.
A1. (Calculating the WACC) The following values apply to the Drop Corporation: rd = 7.5%, re = 13%, T = 38%, D = $100, and E = $200. What is the weighted average cost of capital?
A2. (Mutually exclusive projects) Consider the cash flows given below for the mutually exclusive projects, S and L.
a. If the cost of capital is 10%, what is the NPV of each investment?
b. What is the IRR of each investment?
c. Which investment should you accept?
YEAR 0 1 2
Project S 100 160 0
Project L 100 0 200
A3. (MACRS depreciation) Modigliani Jet Ski Company has purchased several firm cars for a total of $150,000. They are classed as five-year property.
a. What is the annual depreciation charge for these assets?
b. If Modigliani's marginal tax rate is 40%, what is the annual depreciation tax shield?
c. Discounted at 8%, what is the present value of the depreciation tax shields?