Westover Mills is trying to decide whether to lease or buy some new equipment. The equipment costs $48,000, has a 3-year life, and will be worthless after the 3 years. The company has a tax rate of 34 percent, a cost of borrowed funds of 8.5 percent, and uses straight-line depreciation. The equipment can be leased for $16,800 a year. What is the amount of the annual depreciation tax shield?

Question

Quizplus · Accepted Answer

The annual depreciation expense is calculated as the cost of the equipment divided by its useful life. Therefore, the annual depreciation expense is $48,000 / 3 = $16,000. The depreciation tax shield is the depreciation expense multiplied by the tax rate, which is $16,000 * 0.34 = $5,440.

Westover Mills Is Trying to Decide Whether to Lease or Buy