A project will increase sales by $140,000 and cash expenses by $95,001. The project will cost $100,000 and belong in a 30% CCA class. The company has a marginal tax rate of 34%. What is the value of the depreciation tax shield in the second year?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. In the first year, the depreciation expense is 30% of $100,000, which is $30,000. In the second year, the depreciation is calculated on the remaining undepreciated amount (i.e., $100,000 - $30,000 = $70,000), so the depreciation expense is 30% of $70,000, which is $21,000. The tax shield for the second year is then $21,000 * 34% = $7,140. However, none of the provided options match this calculation directly, suggesting a possible miscalculation or misunderstanding in the question's setup or intended calculations. Given the options, the closest or a likely intended correct calculation might involve a different interpretation or additional information not provided in the question. Therefore, based on the standard approach to calculating depreciation and tax shields, there seems to be a discrepancy. The correct approach based on the given information would indeed result in a calculation not directly matching any of the provided choices, indicating a need for clarification or correction.

A Project Will Increase Sales by $140,000 and Cash Expenses