Question

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project?A) $1,080,000B) $1,260,000C) $1,134,000D) $1,890,000

Answer 1

Answer:

B) $1,260,000

Explanation:

The computation of the value of the depreciation tax shield is shown below:

= Annual depreciation expense × marginal corporate tax rate

= $3,600,000 × 35%

= $1,260,000

Simply we multiplied the annual depreciation expense with the marginal corporate tax rate, not the average corporate tax rate so that depreciation tax shield will come.