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LeBron's Lifejackets is considering adding a new product line that is expected to increase annual sales...

LeBron's Lifejackets is considering adding a new product line that is expected to increase annual sales by $375,000 and cash expenses by $297,000. The initial investment will require $345,000 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.  

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Answer #1

Solution :

The annual Value of the Depreciation Tax Shield is calculated as follows

= Annual Value of Depreciation * Tax Rate

As per the Information given in the question we have

Initial Investment in Fixed Asset = $ 345,000

Life of the Project = 6 years

Marginal Tax Rate = 21 %

Annual Depreciation as per the straight line method is

= ( Initial Investment in Fixed Asset / Life of the Project in years )

= $ 345,000 / 6

= $ 57,500

Thus, Annual Depreciation = $ 57,500

The Annual value of the depreciation tax shield = Annual Value of Depreciation * Tax Rate

= $ 57,500 * 21 %

= $ 12,075

Annual Value of Depreciation Tax shield = $ 12,075

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