Sunny Farms is considering investing in a chicken plucker machine that will cost $300,000.The investment will provide an additional $90,000 in sales annually.Sunny Farms' annual cash operating expenses are expected to be $22,000.The machine will be depreciated on a straight-line basis over a 10-year life with a $12,000 estimated salvage value.The company has a 30% tax rate and its required rate of return is 10%.How much is the annual depreciation tax shield?

Question

Quizplus · Accepted Answer

The annual depreciation expense is calculated as (Cost - Salvage Value) / Useful Life = ($300,000 - $12,000) / 10 = $28,800. The depreciation tax shield is the depreciation expense multiplied by the tax rate: $28,800 * 30% = $8,640.

Sunny Farms Is Considering Investing in a Chicken Plucker Machine