Question 1 - Depreciation Tax Shield
Strauss Corporation is making a $67,500 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company's required rate of return is 11 percent.
What is the present value of the tax savings related to depreciation of the equipment?
Question 2 - Cash Flow Implications of Tax Losses
WesternGear.com is expected to have operating losses of $250,000 in its first year of business and $200,000 in its second year. However, the company expects to have income before taxes of $300,000 in its third year and $600,000 in its fourth year. The company's required rate of return is 10 percent.
Assume a tax rate of 40 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2?