Yankee Freight provides truck freight services throughout the northeast United States. The firm is considering an investment

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)?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...