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Celebration Cruises wants to acquire a new tender at a cost $425,000. The tender will have...

Celebration Cruises wants to acquire a new tender at a cost $425,000. The tender will have an estimated salvage value at the end of its 8-year life of $50,000. It is expected that annual incremental income before taxes will be $36,000. Celebration Cruises plans to make the purchase on January 1, 2017. The company's cost of capital is 9% and the required rate of return is 10%. The income tax rate is 32%. How much is the depreciation tax shield for 2017?

$17,000

$46,875

$53,125

$15,000

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Answer #1

Depreciation under Straight line method = (Cost - Salvage value) / Estimated useful life.

= ($425,000 - $50,000) / 8

= $46,875

Depreciation tax shield is the decrease in tax liability due to the depreciation charge.

Depreciation tax shield = Depreciation * Tax rate

= $46,875 * 32%

= $15,000

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