A ﬁrm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 and be depreciated using the straight-line method to a zero book
Value over the 4-year life of the project. The company has a marginal tax rate of 34%. What is the
Value of the depreciation tax shield?

Question

Quizplus · Accepted Answer

First, we need to calculate the net cash flow of the project:
Net cash flow = Sales increase - Cash expenses increase - Project cost
Net cash flow = $135,000 - $105,000 - $120,000 = $-90,000
Since the net cash flow is negative, the project results in a loss. However, we can still calculate the depreciation tax shield by using the following formula:
Depreciation tax shield = Depreciation expense x Marginal tax rate
To calculate the depreciation expense, we use the following formula:
Depreciation expense = Project cost / Number of years
Depreciation expense = $120,000 / 4 = $30,000 per year
Now we can calculate the depreciation tax shield:
Depreciation tax shield = $30,000 x 0.34 = $10,200
Therefore, the value of the depreciation tax shield is $10,200, and the best choice is B.

A ﬁRm Is Considering a Project That Will Increase Sales