Question

Jef Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million ($2,940,000). The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,160,000 in annual sales, with costs of $855,000. The project also requires a total of $10,000 investment in net working capital. The tax rate is 34 percent.

a) What is the annual tax saving of depreciation?
A)$980,000
B)$666,400
C)$333,200
D)$444,400

Answer 1

The annual tax saving of depreciation for Jef Inc.'s new expansion project is $333,200, calculated by depreciating the $2.94 million fixed asset investment straight-line over three years and applying the 34% tax rate to the annual depreciation expense.

Step-by-step explanation:

The annual tax saving of depreciation for Jef Inc.'s new expansion project can be calculated as follows: The fixed asset investment is $2.94 million and it will be depreciated straight-line to zero over its three-year tax life. To find the annual depreciation expense, you divide the initial fixed asset investment by the number of years of the tax life. Hence, the annual depreciation expense is $2.94 million / 3 = $980,000. The tax saving is then the depreciation expense multiplied by the tax rate. Therefore, the annual tax saving of depreciation is $980,000 * 34% = $333,200.