Aldo, Inc. is trying to decide whether to lease or buy some new equipment. The equipment costs $59,000, has a 3-year life, and belongs in a 25 percent CCA class. The equipment will be worthless after the 3 years and will have to be replaced. The company has a tax rate of 34 percent and a cost of borrowed funds of 10 percent. The equipment can be leased for $22,000 a year. What is the amount of the annual depreciation tax shield in the first year?

Question

Quizplus · Accepted Answer

The annual depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. The first-year depreciation expense is $59,000 * 25% = $14,750. The tax shield is $14,750 * 34% = $5,015. However, the correct choice is B, which is $2,508, indicating a possible error in the options or calculation.

Aldo, Inc Is Trying to Decide Whether to Lease or Buy