Biggs Industries is considering two alternative ways to depreciate a proposed investment.
The investment has an initial cost of $100,000 and an expected five-year life. The two
alternative depreciation schedules follow:
Method 1 Method 2
Year 1 depreciation $20,000 $40,000
Year 2 depreciation $20,000 $30,000
Year 3 depreciation $20,000 $20,000
Year 4 depreciation $20,000 $10,000
Year 5 depreciation $20,000 $0
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10
percent, what is the difference between the two methods in the present value of the depreciation
tax benefit? Present value tables or a financial calculator are required.
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