Exercise-18 (Tax savings from depreciation tax shield)
Posted in: Capital budgeting techniques (exercises)
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.
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