Question

Arsenal Company is considering an investment in equipment costing $30,000 with a five-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year. Over the life of the project, the total tax shield created by depreciation is: Select one: A. $10,750 B. $10,500 C. $20,400 D. $39,600

Answer 1

Answer:

option (B) $10,500

Explanation:

Data provided in the question:

Cost  = $30,000

Useful life = 5 years

Salvage value = 0

Tax rate = 35%

Expected net cash inflow before depreciation and taxes = $20,000 per year

Now,

The total tax shield created by depreciation over the life of project

= Tax rate × ( Amount of depreciation over the life of project )

= 35% × ( Cost - Salvage value )

= 0.35 × ( $30,000 - 0 )

= $10,500

Hence,

The answer is option (B) $10,500