Jasper Manufacturing is starting a new project which will require the acquisition of new ﬁxed assets costing $127,000. The assets will have a 5-year life after which time they will be worthless. The
Assets belong in a 25 percent CCA class. The assets can be leased for $27,900 a year. The ﬁrm can
Borrow money at 11 percent and has a 34 percent tax rate. What is the amount of the depreciation
Tax shield in year 3?
A) $7,084
B) $9,486
C) $11,222
D) $12,818
E) $13,265

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. In year 3, the depreciation expense for a 25% CCA class asset is calculated using the declining balance method. The tax shield is then 0.25 * $127,000 * (1 - 0.25)^2 * 0.34 = $7,084.

Jasper Manufacturing Is Starting a New Project Which Will Require