Galveston Excursons Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years. At the end of 15 years, the ship will have no value and will be scuttled. Galveston Excursons' cost of capital is 14
percent, and its marginal tax rate is 35 percent. Refer to Galveston Excursons Corporation. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.) Present value tables or a financial calculator are required.
a. $ 85,991
b. $159,697
c. $210,000
d. $245,688
A
Annual depreciation = $40,000
Tax savings = $14,000
Use PV of Annuity table 15 years, 14%; Constant = 6.1422
$14,000 * 6.1422 = $85,991
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