Lester's is analyzing a purchase versus a lease for some equipment costing $52,800, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The firm can borrow money at 6.5 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 3?
A) $1,758
B) $1,643
C) $1,941
D) $2,012
E) $2,221

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated by multiplying the depreciation expense by the tax rate. In Year 3, the depreciation expense is 14.82% of $52,800, which equals $7,819.36. The tax shield is then $7,819.36 multiplied by 21%, which equals $1,643.06.

Lester's Is Analyzing a Purchase Versus a Lease for Some