What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?
A) $10,866
B) $13,268
C) $17,500
D) $37,908

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. The annual depreciation is $10,000 ($50,000/5 years). The tax shield is $3,500 per year ($10,000 * 35%). The present value of these tax shields over 5 years at a 10% discount rate is $13,268.

What Is the Present Value at a 10% Discount Rate