Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm’s tax rate is 39 percent. Estimate the present value of the tax benefits from depreciation?

$385,628

Depreciation = ($2,000,000 - $250,000)/10 = $175,000

$175,000 x .39 = $68250 tax savings each period.

Across the entire project, these savings will constitute a 10 period annuity.

Pmt = 68,250, FV = 0, I = 12, N = 10, PV = 385,627.72

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