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Biggs Industries is considering two alternative ways to depreciate a proposed investment
Biggs Industries is considering two alternative ways to depreciate a proposed investment. The investment has an initial cost of $100,000 and an expected five-year life. The two alternative depreciation schedules follow:
|
|
Method 1 |
Method 2 |
|
Year 1 depreciation |
$20,000 |
$40,000 |
|
Year 2 depreciation |
$20,000 |
$30,000 |
|
Year 3 depreciation |
$20,000 |
$20,000 |
|
Year 4 depreciation |
$20,000 |
$10,000 |
|
Year 5 depreciation |
$20,000 |
$0 |
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent, what is the difference between the two methods in the present value of the depreciation tax benefit? Present value tables or a financial calculator are required.
-
-
- $7,196
- $0
- $2,878
- $6,342
-
Expert Solution
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