Johnson wholesale corporation has purchased a new piece of equipment for $644,000, with $46,000 of that total being costs for installation. After discussions with its accounting firm the company plans to depreciate the installation costs straight-line over 5 years. The cost of capital is 7. 5% and the tax rate is 22%. Rounded to the nearest dollar, what is the present value of the cost of the equipment?.

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ogorwyne ogorwyne · Answer 1 · 2022-12-01T19:31:51+01:00

Since the cost of capital is 7. 5% and the tax rate is 22%., the present value of the cost of the equipment is $635,811

The cost of the equipment is given as $ 644, 000

The stated cost of the asset is guven as $ 46 000

The years that the installation would last is the life = 5 years

We have to solve for the depreciation

The cost of asset / life

$ 46 000 / 5 years

= 9200 dollars

We have to solve for the tax saving. This is

depreciation * tax rate

= 9200 dollars * 22%.

= $2024

we have to solve for the present value of tax saving by using the formula

=PV(rate, nper, -pmt)

The present value of tax saving is given as $ 8188.87

The present value of the cost of the equipment = equipment cost - present value of tax saving

= $644,000 - $ 8188.87

= $635,811

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