Suppose a machine that costs $80,000 has a useful life of 10 years. Also suppose that depreciation on the machine is $8,000 for tax purposes in year 4. The tax rate is 40%. The tax savings from the depreciation tax shield in year 4 would be:
A) $4,800 inflow
B) $3,200 inflow
C) $4,800 outflow
D) $3,200 outflow

Question

Quizplus · Accepted Answer

The tax savings from the depreciation tax shield can be calculated as: 
Tax Savings = Depreciation * Tax Rate = $8,000 * 40% = $3,200 inflow.
Therefore, the correct answer is B, $3,200 inflow.

Suppose a Machine That Costs $80,000 Has a Useful Life