Question

Yankee Freight provides truck freight services throughout the northeast United States. The firm is considering an investment in improved logistics management requiring a mainframe computer and communications software, which would cost $ 1,000,000 and have an expected life of eight years. For tax purposes, the investment will be depreciated using the straight-line method, with no salvage value. The company’s cost of capital and tax rates are 8 and 30 percent, respectively.
a. Compute the present value of the depreciation tax benefit.
b. Assume instead that Yankee Freight uses the double- declining-balance method of depreciation with a five-year life. Compute the present value of the depreciation tax benefit.
c. Why is the depreciation tax benefit computed in (b) larger than that computed in (a)?



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  • CreatedJune 03, 2014
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