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%.
Calculate annual tax savings from depreciation tax shield.
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
Annual tax savings from depreciation tax shield = $70,000 × 0.30
The Marshal company will save $21,000 tax per year.Next page is: Exercise-19 (After-tax cost computation)
Prev page is: Exercise-17 (After-tax cash flows in net present value analysis)