Your Company Is Considering a New Project That Will Require

question 108

Multiple Choice

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14%, and the firm's tax rate is 30%. Estimate the present value of the tax benefits from depreciation.

• A) $14,865.93
• B) $14,030.79
• C) $15,017.25
• D) $15,997.13

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Definitions:

Holding Period

The duration of time an investment is held before it is sold, impacting the capital gains tax implications.

Risk Aversion

A preference to minimize uncertainty and avoid risk in investment decisions.

Systematic Risk

The inherent risk that affects the entire market or a wide range of securities, often caused by factors like economic, political, or global events, and cannot be mitigated just by diversification.

Beta

Beta is a measure of a stock's volatility in relation to the overall market, indicating the stock's risk compared to that of the market.