Siddon Inc.is considering investing in equipment that costs $20 000.The equipment would be depreciated using the straight-line method with no half-year convention over five years and have no salvage value.If the company has a 40 per cent income tax rate and desires an after-tax rate of return of 12 per cent on investments,the total present value of the depreciation tax shield is:

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Quizplus · Accepted Answer

The depreciation tax shield is calculated by taking the depreciation expense, which in this case is $20,000 / 5 = $4,000 per year, and multiplying it by the tax rate of 40%. This gives an annual tax shield of $1,600. The present value of this annual tax shield over 5 years, discounted at the company's desired after-tax rate of return of 12%, results in a total present value of approximately $5,768.