Question

GRZ Inc. purchased a customized delivery truck in January 2018 for $70,000. They plan to use this truck for 7 years, and the company estimates the truck's salvage value will be $14,000 at the end of its useful life. (The company uses the straight-line method when recording depreciation.) In 2018, GRZ Inc.'s net income was $575,000, and their tax rate was 35%. What is the value of the depreciation tax shield?A)$2,800 B)$19,600 C)$3,500 D)$24,500 E)$201,250

Answer 1

The correct answer is A) $2.800

Step-by-step explanation:

Using the straight-line method to depreciate, the calculation to find the depreciation tax shield is the following:

1. Finding the depreciable cost:
   `Depreciable cost = purchase price ($70,000) - salvage value ($14,000) = $56,000`
2. Finding the depreciation per year:
   `Depreciation/year = (Depreciable cost (56,000))/(Asset useful life (7 years)) = $8000`
3. Finally, the depreciation tax shield for 2018:
   `Depreciation tax shield = Dep/year ($8,000) * tax rate (0,35) = $2,800`