depreciation tax shield

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Khb_taylors

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Feb 11, 2011
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A firm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 and be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield?
 
Sales are up. Increase taxes.
Depreciation of 120,000 / 4 for four years. Decrease taxes.

Please do NOT present a problem statement with NO work shown.

RBGTHGANH
 
You didn't read the sentence that starts with "please", did you?

Do it without the shield and observe the total taxes.
Do it with the shield and observe the total taxes.
Subtract.

The formula is to think it through and do your best to make logical sense of it.
 
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