The Corner Store is evaluating a lease on some equipment that costs $79,000 and has a two-year life. The pretax cost of borrowed funds is 8.4 percent and the tax rate is 21 percent. What is the amount of the annual depreciation tax shield for Year 1 and Year 2 if the firm uses 100 percent bonus depreciation?
A) $16,590; $0
B) $0; $16,590
C) $8,295; $8,295
D) $0; $0
E) $16,590; $8,295

Question

Quizplus · Accepted Answer

With 100 percent bonus depreciation, the firm can deduct the entire cost of the equipment in the first year. The depreciation tax shield for Year 1 is calculated as the cost of the equipment ($79,000) multiplied by the tax rate (21 percent), which equals $16,590. There is no depreciation left for Year 2, so the tax shield is $0.

The Corner Store Is Evaluating a Lease on Some Equipment