McElroy Carousel Horses is considering adding a new product line that will requi
ID: 2704545 • Letter: M
Question
McElroy Carousel Horses is considering adding a new product line that will require an initial investment of $407,000 in fixed assets and that will be depreciated using the straight-line method to a zero book value over the 4-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?
A. $5,120
B. $13,160
C. $25,840
D. $32,560
E. $41,840
McElroy Carousel Horses is considering adding a new product line that will require an initial investment of $407,000 in fixed assets and that will be depreciated using the straight-line method to a zero book value over the 4-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?Explanation / Answer
Depreciation tax shield = ($96,000/6) 0.32 = $5,120