Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years.Assuming the company is subject to a 40% tax rate during the period and a zero salvage value,what is the depreciable cost of the new asset?

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the tax rate. Given a tax shield of $10,000 and a tax rate of 40%, the annual depreciation expense is $10,000 / 0.40 = $25,000. Over 10 years, the total depreciable cost is $25,000 * 10 = $250,000.

Newton Company Is Considering the Purchase of an Asset That