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