Keyser Mining is considering a project that will require the purchase of $479,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the five-year life of the project after which it will be worthless. The required return is 12 percent and the tax rate is 30 percent. What is the value of the depreciation tax shield in Year 4 of the project assuming no bonus depreciation is taken?
A) $28,740
B) $32,200
C) $78,600
D) $138,400
E) $143,700

Question

Quizplus · Accepted Answer

The depreciation expense each year is $479,000 / 5 = $95,800. The depreciation tax shield in any given year is the depreciation expense multiplied by the tax rate. Therefore, in Year 4, the depreciation tax shield is $95,800 * 30% = $28,740.

Keyser Mining Is Considering a Project That Will Require the Purchase