Peter Pontificator Is Proposing to Purchase a Paddle Machine, Which

question 8

Multiple Choice

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%: What is the present value of the tax shield if straight-line depreciation is used?

• A)$261,261
• B)$271,679
• C)$240,700
• D)$217,343
• E)None of the above

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Definitions:

Tax Treatment

The specific way tax laws apply to particular transactions or classes of income in a financial context.

Interest Rates

The percentage rate of a loan that is charged as interest to the borrower, routinely represented as an annual percentage of the outstanding loan principal.

New Shares

Shares that are issued by a company for the first time to the public, typically through an initial public offering (IPO) to raise capital.

Indirectly Borrowing

Obtaining funds through an intermediary, such as by taking out a loan through a bank, rather than directly from a lender.