Corner Market is considering adding a new product line that is expected to increase annual sales by $418,000 and cash expenses by $337,000. The initial investment will require $390,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the six-year life of the project. Ignore bonus depreciation. The company has a marginal tax rate of 21 percent. What is the annual value of the depreciation tax shield?
A) $13,650
B) $13,160
C) $27,300
D) $163,800
E) $136,500

Question

Quizplus · Accepted Answer

The annual depreciation expense is calculated as the initial investment divided by the life of the project: $390,000 / 6 = $65,000. The annual value of the depreciation tax shield is then calculated as the depreciation expense multiplied by the tax rate: $65,000 * 0.21 = $13,650.

Corner Market Is Considering Adding a New Product Line That