Please show calculation The managers of Poncho Parts. Inc. plan to manufacture e

Question

Please show calculation

The managers of Poncho Parts. Inc. plan to manufacture engine blocks for classic cars from the 1960s. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800.000 and will be depreciated on a straight-ftne basis to zero over the project's life. The firm expects to be able to sell the equipment for $150.000 at the end of 5 years. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35 percent tax rate and a 12 percent discount rate. What will be the annual depreciation tax shield?

Explanation / Answer

Depreciation = $800,000/5 =$160,0000 per year Annual Depreciation tax shield = $160,000 * 0.35 = $56,000

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