US CMA Part 2 · Chapter 8 · Question 4 of 15
A company records annual tax depreciation of $100,000 on new equipment and its tax rate is 25%. What is the annual depreciation tax shield?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $25,000
Explanation
Depreciation tax shield = depreciation x tax rate = $100,000 x 25% = $25,000. Depreciation is not a cash outflow, but it reduces taxable income and therefore cash taxes paid.
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