Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

-A firm is considering investing in a new machine that will cost $600 000 and will be depreciated using the straight-line method over five years. If the firm's marginal tax rate is 30%, what is the annual depreciation tax shield of purchasing the machine?
A)$36 000
B)$120 000
C)$234 000
D)$107 692

Question

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
 
-A firm is considering investing in a new machine that will cost $600 000 and will be depreciated using the straight-line method over five years. If the firm's marginal tax rate is 30%, what is the annual depreciation tax shield of purchasing the machine?
A)$36 000 
B)$120 000 
C)$234 000 
D)$107 692

Quizplus · Accepted Answer

The annual depreciation expense is calculated as the cost of the machine divided by its useful life, which is $600,000 / 5 = $120,000. The depreciation tax shield is the depreciation expense multiplied by the tax rate, which is $120,000 * 0.30 = $36,000.

Use the Information for the Question(s)below