Answer:
Estimate the present value of the tax benefits from depreciation:
D. $1,851
Explanation:
<em>Step 1: Determine annual depreciation</em>
A.D=(A.C-S.V)/N
where;
A.D=annual depreciation
A.C=acquisition cost
S.V=salvage value
N=useful life
In our case;
A.D=unknown, to be determined
A.C=$10,000
S.V=$3,000
N=5 years
replacing;
A.D={(10,000-3,000)/5}=7,000/5=$1,400
Annual depreciation=$1,400
<em>Step 2: Determine annual tax benefits</em>
Annual tax benefits=tax rate×annual depreciation
where;
tax rate=34%=34/100=0.34
annual depreciation=$1,400
replacing;
Annual tax benefits=0.34×1,400=$476
<em>Step 3: Determine present value of the annual tax benefits</em>
Year Future value Present value
1 476 476/{(1+0.09)^1}=436.70
2 476 476/{(1+0.09)^2}=400.64
3 476 476/{(1+0.09)^3}=367.56
4 476 476/{(1+0.09)^4}=337.21
5 476 476/{(1+0.09)^5}=309.37
Total present value of the tax benefits=436.70+400.64+367.56+337.21+309.37=$1,851.48
Estimate the present value of the tax benefits from depreciation=$1,851
