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-year 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

The annual depreciation expense is calculated as (Cost - Salvage Value) / Useful Life = ($100,000 - $10,000) / 10 = $9,000. The depreciation tax shield is the depreciation expense multiplied by the tax rate: $9,000 * 40% = $3,600.

Southport Company Is Considering the Purchase of a Piece of Equipment