Lincoln Company has purchased equipment for $200,000. After it is fully depreciated, the equipment will have no salvage value. Lincoln may select either of the following depreciation schedules for tax purposes:

Assuming a 40% tax rate and a 12% desired annual return, compute the total present value of the tax savings provided by these alternative depreciation tax shields. Which depreciation schedule would be more attractive to Lincoln?

Transcribed Image Text:

Option 2 Depreciation $40,000 $20,000 64,000 40,000 38,400 40,000 23,040 40,000 23,040 40,000 11,520 20,000 Year Option 1 Depreciation 123456