Siddon Inc. is considering investing in equipment that costs $24,000. 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 35 percent income tax rate and desires an after-tax rate of return of 11 percent on investments, the total present value of the depreciation tax shield is:

Question

Quizplus · Accepted Answer

The total present value of the depreciation tax shield is calculated by multiplying the annual depreciation expense by the tax rate and then finding the present value of these tax savings. The annual depreciation expense is $24,000 / 5 = $4,800. The annual tax savings from depreciation is $4,800 * 35% = $1,680. The present value of these tax savings over 5 years at an 11% discount rate is approximately $6,209.