Mosely Enterprises is trying to decide whether to lease or buy some new equipment. The equipment costs $57,000, has a 4-year life and will be worthless after the 4 years. The cost of borrowed funds is 9.5 percent and the tax rate is 35 percent. The equipment can be leased for $15,000 a year. What is the amount of the annual depreciation tax shield if the firm uses straight-line depreciation?

Question

Quizplus · Accepted Answer

The annual depreciation tax shield can be calculated using the formula: (Cost of the equipment / Life of the equipment) * Tax rate. Using straight-line depreciation, the annual depreciation expense is ($57,000 / 4) = $14,250. The tax shield is then $14,250 * 35% = $4,987.50.

Mosely Enterprises Is Trying to Decide Whether to Lease or Buy