Peter Pontificator is proposing to purchase a paddle machine, which will cost $1 million, last eight years and have a salvage value of 20%. Given a tax rate of 35%, and a cost of capital of 6%: If double-declining balance depreciation is used, and PP switches to straight-line depreciation in year 6, the present value of the depreciation tax shield is:
A. $287,506
B. $230,005
C. $286,513
D. $229,211
E. none of the above
A. $287,506
Double declining rate = 2 × (1/life) = 2 × (1/8) = 25%
The depreciable amount = purchase price. Salvage value is ignored in this method.
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