Question

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $ 4 million. If​ Sisyphean's marginal corporate tax rate is 35​% and its average corporate tax rate is​ 30%, then what is the value of the depreciation tax shield on the​ company's new​ project?

Answer 1

Answer: $1.4 million

Explanation: As, in the given case we need to compute the depreciation tax shield, we will use marginal corporate tax rate instead of average corporate tax rate as it will result in additional savings to the company in the form of taxes it paid.

Thus, shield amount can be computed as follows :-

($4,000,000) * (35%) = $1,400,000