Sally Sweet Tooth Company will purchase a van for $50,000. The van's depreciable life is 5 years with no terminal salvage value. Assume a tax rate of 40% and a required after- tax rate of return of 12%. The annual after- tax effect of depreciation, if the straight- line method is used for taxes, is a:

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Quizplus · Accepted Answer

The annual depreciation expense is $50,000 / 5 = $10,000. The tax shield from depreciation is $10,000 * 40% = $4,000, which is an inflow.

Sally Sweet Tooth Company Will Purchase a Van for $50,000