Firm X needs 1 computer.  Firm X can buy 1 computer for 3,059. The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line depreciation method and the economic life of the computer is 2 years. Compute the depreciation tax shield of year 2.

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Asked Nov 13, 2019
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Firm X needs 1 computer.  Firm X can buy 1 computer for 3,059. The cost of debt for Firm X is 5%. The corporate tax equals 35%. Firm X follows a straight-line depreciation method and the economic life of the computer is 2 years. Compute the depreciation tax shield of year 2.

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Expert Answer

Step 1

Cost of the Computer = $3,059

Economic Life of the Computer = 2 Years

Disposal Value of the Computer = $0

 

Calculation of the depreciation expense is as follows:

Cost of the Computer Disposal Value of the Computer
Depreciation Expense
Economic Life of the Computer
$3,059-$0
2
$3,059
2
= $1529.50
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Cost of the Computer Disposal Value of the Computer Depreciation Expense Economic Life of the Computer $3,059-$0 2 $3,059 2 = $1529.50

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Step 2

As the Firm X uses the straight-line method for depreciation, then depreciation for both year is $1529.50

 

Depreciation Expense of ...

Depreciation Tax Sheild of Year 2 = Depreciation Expense of Year 2x Tax Rate
=$1529.50x35%
= $535.325
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Depreciation Tax Sheild of Year 2 = Depreciation Expense of Year 2x Tax Rate =$1529.50x35% = $535.325

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