Exercise-18 (Tax savings from depreciation tax shield)

The Marshal company has just purchased an asset costing $420,000. The straight line method of depreciation will be used and the entire cost of the asset will be depreciated over 6 years. The tax rate of Marshal company is 30%.

Required:

Calculate annual tax savings from depreciation tax shield.

Solution:

The annual depreciation would be computed first and then multiplied by 30% or 0.30 to find the annual tax savings from depreciation tax shield.

Annual depreciation = $420,000 / 6 years

= $70,000

Annual tax savings from depreciation tax shield = $70,000 × 0.30

= $21,000

The Marshal company will save $21,000 tax per year.