Southport Company is considering the purchase of a piece of equipment that costs $100,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 16-year useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

Question

Quizplus · Accepted Answer

The annual depreciation expense is calculated as ($100,000 - $10,000) / 16 = $5,625. The tax shield provided by this investment is equal to the depreciation expense multiplied by the tax rate, or $5,625 * 0.4 = $2,250. This represents the amount that the company can reduce its taxable income for each year of the equipment's useful life. Therefore, the annual amount of the depreciation tax shield provided by this investment is $2,250 * 1.6 = $3,600. Option C is the correct answer.

Southport Company Is Considering the Purchase of a Piece of Equipment