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The startup costs of a project is $500,000. For years 1 through 5, the annual revenues...

The startup costs of a project is $500,000. For years 1 through 5, the annual revenues are expected to be $210,000, and the annual costs are expected to be $110,000 per year. The firm faces a tax rate of 40%, and will depreciate the entire startup cost over years 1 through 4 in a straight line method.

Based on the above information, what is the depreciation tax shield in year 2?

A. $40,000

B. $125,000

C. $60,000

D. $50,000

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Answer #1

Annual Depreciation = Cost of Project / Depreciable life years

= $500,000 / 4 = $125,000

Depreciation Tax shield for Year 2 = Depreciation for year 2 * Tax Rate = $125,000 * 0.40 = $50,000

Hence, Option "D" is correct.

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