McElroy Carousel Horses is considering adding a new product line that will requi
ID: 2626970 • Letter: M
Question
McElroy Carousel Horses is considering adding a new product line that will require an initial investment of $484,500 in fixed assets and that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The project is expected to increase annual sales by $338,000 and annual cash expenses by $184,000. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?
McElroy Carousel Horses is considering adding a new product line that will require an initial investment of $484,500 in fixed assets and that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The project is expected to increase annual sales by $338,000 and annual cash expenses by $184,000. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?
$5,120
$13,160
$25,840
$32,560
$41,840
$5,120
$13,160
$25,840
$32,560
$41,840
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Depreciation tax shield indicates the savings in tax liability arising out of annual depreciation expense.
Annual Value of Depreciation Tax Shield = Depreciation*Tax Rate
Depreciation = Cost/Estimated Life = 484500/6 = 80750
Annual Value of Depreciation Tax Shield = 80750*32% = $25840
Option C ($25840) is the correct answer.
Thanks.