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# Depreciation tax shield and Undertaking Declining Balances

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Undertake both a declining balance and straight -line depreciation of an item of capital expenditure of \$2 million. The declining balance deprecation rate is 30%,effective tax rate is 45%, cost of capital is 10% and straight -line depreciation rate is 20%.

https://brainmass.com/economics/personal-finance-savings/depreciation-tax-shield-undertaking-declining-balances-338195

#### Solution Summary

The solution explains the calculation of depreciation tax shield under declining balance and straight line method

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## 1) What is the net present value of the project? 2) a. What is the gain from merger? b. What is the cost of the cash offer? c. What is the NPV of the acquisition under the cash offer?

25. Project Evaluation.

The following table presents sales forecasts for Golden Gelt Giftware. The unit price is \$40. The unit cost of the giftware is \$25.
Year Unit Sales
1 22,000
2 30,000
3 14,000
4 5,000
Thereafter 0
It is expected that net working capital will amount to 20 percent of sales in the following year. For example, the store will need an initial (year-0) investment in working capital of .20 × 22,000 × \$40 = \$176,000. Plant and equipment necessary to establish the Giftware business will require an additional investment of \$200,000. This investment will be depreciated using MACRS and a 3-year life. After 4 years, the equipment will have an economic and book value of zero. The firm's tax rate is 35 percent. What is the net present value of the project? The discount rate is 20 percent.

Merger Gains and Costs.
8. Merger Gains and Costs. Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are \$20 million and \$10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by \$500,000 per year in perpetuity. Velcro Saddles is willing to pay \$14 million cash for Pogo. The opportunity cost of capital is 8 percent.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the NPV of the acquisition under the cash offer?
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Attached you will find the PDF documents to some practice study problems that I am still trying to grasp and understand. These are the ones that I did not know how to do. Your help is greatly appreciated.

Chapter 8: practice problem 25 on PDF document page 234

Chapter 21: practice problem 8 on PDF document page 595

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