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# Annual depreciation

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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.

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#### Solution Preview

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
Note:
1) Year 1-Book value=\$100000
2) Year 2-Book value=\$100000-10000=\$90000
3) Year 3-Book ...

#### Solution Summary

This explains the steps to compute Annual depreciation.

\$2.19

## 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?

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