You are considering investing in a process that is a cost cutting proposal

Accounting May 16, 2021

You are considering investing in a process that is a cost cutting proposal. Net income from the project is expected to equal $27.50 for each of the three years of the project's life. The process has an initial cost of $125 and will be depreciated straight line to zero. Assume a 34% tax bracket, a discount rate of 15%, and a salvage value of zero.

What is the value of the annual depreciation tax shield for the project?

A) $ 6.80

B) $ 8.50

C) $14.17

D) $27.50

E) $41.67

Expert Solution

Computation of the value of annual depreciation tax shield for project:-

Annual depreciation = Cost / Useful life

= $125 / 3

= $41.67

Depreciation tax shield = Annual depreciation * Depreciation rate

= $41.67 * 34%

= $14.17

Hence, the correct option is C) $14.17

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