A firm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 and be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34%. What is the value of the depreciation tax shield?

Question

Quizplus · Accepted Answer

The depreciation expense per year is the cost of the project divided by its life, which is $120,000 / 4 = $30,000. The depreciation tax shield is the depreciation expense multiplied by the tax rate, which is $30,000 * 0.34 = $10,200.

A Firm Is Considering a Project That Will Increase Sales