Southport Company is considering the purchase of a piece of equipment that costs $100,000. The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10 years useful life. Assuming a tax rate of 40%, what is the annual amount of the depreciation tax shield provided by this investment?

Question

Quizplus · Accepted Answer

Depreciation tax shield = Depreciation expense × Tax rate
Depreciation tax shield = [(Cost - Salvage value) ÷ Useful life] × Tax rate
Depreciation tax shield = [($100,000 - $10,000) ÷ 10] × 0.40 = $9,000 × 0.40 = $3,600

Southport Company Is Considering the Purchase of a Piece of Equipment