A two-year project has sales of $582,960, cash costs of $411,015, and depreciation expense of $68,109. The tax rate is 24 percent and the discount rate is 12 percent. What amount should be used as the annual depreciation tax shield when computing the project's operating cash flow? Ignore bonus depreciation.

Question

Quizplus · Accepted Answer

Annual depreciation tax shield = Depreciation expense x Tax rate
= 68,109 x 0.24 = $16,346.16 
Operating cash flow = Sales Revenue - Cash Costs - Annual Depreciation Tax Shield

A Two-Year Project Has Sales of $582,960, Cash Costs of $411,015