Keyser Mining Is Considering a Project That Will Require the Purchase

question 51

Multiple Choice

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the value of the depreciation tax shield in year 4 of the project?

• A)$49,000
• B)$52,200
• C)$68,600
• D)$71,400
• E)$76,500

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Definitions:

Legislative

Pertaining to the branch of government responsible for creating laws.

Private Letter Rulings

Issued by the IRS, these are written decisions provided to taxpayers, offering guidance on the tax treatment of complex transactions.

Tax Treatment

The specific way tax laws apply to different types of income, expenses, and individuals.

Tax Authority

The governmental body responsible for administering and collecting taxes within a specific jurisdiction.