Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $21,600 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period, and a zero salvage value, what is the depreciable cost of the new asset?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. Given the annual depreciation tax shield is $21,600 and the tax rate is 40%, the annual depreciation expense can be calculated as $21,600 / 0.4 = $54,000. Over 10 years, the total depreciable cost is $54,000 * 10 = $540,000.

Newton Company Is Considering the Purchase of an Asset That