10-28-2002, 04:40 PM
Join Date: Aug 2002
Studying for the rest of my life.
College: Alumnus - Queens College - CUNY
Favorite beer: Stone Ruination IPA
Here is the solution I posted on the casact list.
OK, got it now. The trick in the problem (at least to me) is to realize that senior management wants a tax savings whose PRESENT VALUE is $17,500 at 8%.
The tax savings is the present value of the tax shields provided at 8% where the corporate tax rate is 35%.
The tax shield is provided by the depreciation amounts, so the tax savings are 35% of the depreciation amounts.
For SOY, the depreciation at time t (where the life is n) is t/[n*(n+1)/2]*(A-S)
DRAW A TIMELINE!!!!
You will see that the cashflows of the Tax Shield of the payments become:
.35*(20/210)*(A-S)/1.08 + .35*(19/210)*(A-S)/(1.08^2) + ........
17,500 = (Da)[20,.08]/210 * .35 * (A-S) or
(17,500 * 210)/(.35 * (Da)[20,.08]) = 110,000 -S or
S = 110,000 - (17,500 * 210)/(.35 * (Da)[20,.08])
Now (Da)[20,.08] = 127.27 so
S = 110,000 - (3675000/44.55)
S = 110,000 - 82499.72
S = 27,500.28 or $27,500
To: "Study Group 2" <firstname.lastname@example.org>
10/21/2002 10:38 cc:
AM Subject: [studygroup2] more interest theory
Please respond to
"Study Group 2"
OK I have yet another Interest Theory problem for you all, this is from an
"A machine has been purchased by a company for 110,000. The asset will be
depreciated over 20 years using the sum-of-digits method. You have been
asked by senior management to set up the tax savings of 17,500 at an annual
tax rate of 35% and an annual interest rate of 8%. Calculate the salvage
My problem here is figuring out what to do with the tax savings and how
relates to doing a depreciation calculation. I am missing something
I don't even know where to begin with this. Thanks for any help!
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Last edited by Avi; 11-29-2006 at 02:57 AM..