Louie's Leisure Products is considering a project which will require the purchase of €1.4 million in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.Louie's expects to sell the equipment at the end of the project for 20% of its original cost.Annual sales from this project are estimated at €1.2 million.Net working capital equal to 20% of sales will be required to support the project.All of the net working capital will be recouped at the end of the project.The firm desires a minimal 14% rate of return on this project.The tax rate is 34%.What is the value of the depreciation tax shield in year 2 of the project?

Question

Quizplus · Accepted Answer

The annual depreciation expense is €1.4 million / 7 = €200,000. The depreciation tax shield is the depreciation expense multiplied by the tax rate: €200,000 * 34% = €68,000.

Louie's Leisure Products Is Considering a Project Which Will Require