RDP 8907: Tax Policy and Housing Investment in Australia Appendix III


Under the present tax laws the depreciation allowance is 2.5 per cent of the cost of construction each year for forty years. The tax saving in any year is equal to the depreciation allowance multiplied by the tax rate. This saving occurs each year for forty years. The present value of this annual saving is easily calculated by discounting the cash flow savings by the cost of capital i. The value of d is given by:

The above formula is the formula for an annuity paying 0.04u each year for forty years and is given in any finance textbook. Note that d is the present value of tax savings as a fraction of investment expenditure.