Southport Company is considering the purchase of a piece of equipment that costs $114,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $6,500 over its 10 years useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

Question

Quizplus · Accepted Answer

The annual depreciation expense is ($114,000 - $6,500) / 10 = $10,750. The depreciation tax shield is $10,750 * 40% = $4,300.

Southport Company Is Considering the Purchase of a Piece of Equipment