Darwin Limited is considering purchasing a new asset with an initial cost of $75 000 and an estimated annual income of $20 000. Cash operating expenses are expected to be $11 500 per year. Straight-line depreciation will be used over the five-year life of the asset and salvage value of $15 000 is to be considered in computing depreciation. Assuming that the income tax rate is 30%, what is the amount of annual tax savings from depreciation? (Assume the straight-line depreciation method is used for both accounting and tax purposes.)

Question

Quizplus · Accepted Answer

The annual depreciation expense is calculated as (Initial Cost - Salvage Value) / Useful Life = ($75,000 - $15,000) / 5 = $12,000 per year. The tax savings from depreciation is then calculated as Depreciation Expense * Tax Rate = $12,000 * 30% = $3,600.

Darwin Limited Is Considering Purchasing a New Asset with an Initial