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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 :

mboneu

Answer:

The correct answer is A) $2.800

Explanation:

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

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

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