Celebration Cruises wants to acquire a new tender at a cost $425,000.The tender will have an estimated salvage value at the end of its 8-year life of $50,000.It is expected that annual incremental income before taxes will be $36,000.Celebration Cruises plans to make the purchase on January 1, 2017.The company's cost of capital is 9% and the required rate of return is 10%.The income tax rate is 32%.How much is the depreciation tax shield for 2017?

Question

Quizplus · Accepted Answer

The depreciation tax shield for 2017 is calculated by first determining the annual depreciation expense and then multiplying that by the tax rate. The annual depreciation expense is calculated using straight-line depreciation: (Cost - Salvage Value) / Useful Life = ($425,000 - $50,000) / 8 = $46,875 per year. The depreciation tax shield is then $46,875 * 32% = $15,000.

Celebration Cruises Wants to Acquire a New Tender at a Cost