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The revised depreciation tax shield is $283,035, calculated as follows: Year 1 Year 2 Year 3 Year 4 Total MACRS Depreciation 33.33% 44.45% 14.81% 7.41% Depreciation $333,300 $444,500 $148,100 $74,100 × .40 = Depreciation tax shield $133,320 $177,800 $59,240 $29,640 × Discount Factor, PV of $1 @ 20% .833 .694 .579 .482 PV of Depreciation Tax Shield $111,056 $123,393 $34,300 $14,286 $283,035
This answer results from multiplying the annual depreciation by 1 ? the tax rate to calculate the depreciation tax shield. The depreciation tax shield is the annual depreciation multiplied by the tax rate, not 1 ? the tax rate.
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This is the NPV of the current depreciation tax shield, calculated using straight-line depreciation for a period of 8 years. The question asks for the NPV of the revised depreciation tax shield, calculated using the MACRS 3-year property rates given.