Jamestown Industries is contemplating the acquisition of some new equipment. The purchase price is $40,000. The equipment has a 4-year life after which time it will be worthless. The equipment
Belongs in a 35 percent CCA class. The equipment can be leased for $11,000 a year. The ﬁrm can
Borrow money at 7 percent and has a 35 percent tax rate. What is the amount of the depreciation
Tax shield in year 4?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. In year 4, the CCA rate is 35%, so the depreciation expense is $40,000 * 0.35 = $14,000. The tax shield is $14,000 * 0.35 = $4,900. However, due to the declining balance method, the actual depreciation in year 4 is less, and the tax shield is $1,708.

Jamestown Industries Is Contemplating the Acquisition of Some New Equipment