Droids-R-Us Inc.(DRU),is considering the installation of a new production line to make service mechanoids.The cost of the new manufacturing equipment is $2.2 million.The machines are classified as 7-year properties.(MACRS rates are provided in the table,below.)The machines will be purchased at the beginning of 2014.(DRU uses a mid-year placed-in-service convention.)DRU's engineers estimate that the new assembly line could be ready for operations in early 2014.Annual EBITDA is forecasted to be $1.3M for 2014 and all subsequent years of the project.DRU's marginal tax rate is 35%.What is the value of the depreciation tax shield in 2015? (Do NOT assume that the equipment is salvaged in 2015.)Round your answers to the nearest dollar.

Question

Quizplus · Accepted Answer

First determine the amount of depreciation: Depr = d × C₀ 2015 is the second year of the asset's life so d = 0.2449 Depr = 0.2449 × $2,200,000 = $538,780. Compute the depreciation tax shield: Depreciation Tax Shield = T × Depr = 0.35 × $538,780 = $188,573