Bagley Inc. is considering purchasing a piece of farm equipment worth $280,000. The equipment would be depreciated on a straight-line basis assuming no residual value over the course of 7 years, after which time it would be scrapped.
Assuming that the tax rate is 25%, and the discount rate is 6%, what would be the amount of the annual depreciation tax shield of the proposed equipment?

Question

Quizplus · Accepted Answer

Yearly Depreciation: $280,000 / 7 years = $40,000/year
Tax shield from depreciation: $40,000 × 0.25 = $10,000