You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life.
The equipment has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax
Bracket, a discount rate of 15%, and a salvage value of zero.
What is the value of the annual depreciation tax shield for year 2 of the project?

Question

Quizplus · Accepted Answer

First, we need to calculate the depreciation value of the equipment for each year:
Year 1: $125 x 20% = $25
Year 2: ($125 - $25) x 20% = $20
Year 3: ($125 - $25 - $20) x 20% = $16

Next, we need to calculate the annual depreciation tax shield for year 2 of the project:
Depreciation tax shield = Depreciation value x Tax rate
Depreciation tax shield = $20 x 34%
Depreciation tax shield = $6.80

Therefore, the value of the annual depreciation tax shield for year 2 of the project is $6.80. The best choice is C because it is the correct calculated value.

You Are Considering Investing in a Piece of Equipment to Implement