How to calculate Present Value Tax Shield

60 answer 2. Your firm is considering a project that would require purchasing $7.2 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm's tax rate is 31%, the appropriate cost of capital is 9%, and the equipment can be depreciated a. Straight-line over a 10-year period, with the first deduction starting in one year. b. Straight-line over a five-year period, with the first deduction starting in one year. c. Using MACRS depreciation with a five-year recovery period and starting immediately. d. Fully as an immediate deduction. A Answer Equipment cost = 7.2 Tax rate = 31% Cost of capital = 9% PV(DTS) 1 [MACRS] 20% 32% 19% 12% 12% 6% Option a $1.43 0.22 0.22 0.22 0.22 0.22 0.22 0.22 0.22 0.22 Option t $1.74 0.45 0.45 0.45 0.45 0.45 Optione $1.93 0.45 0.71 0.43 0.26 0.26 0.13 Option d $2.23 10 0.22 2.23