Southport Company Is Considering the Purchase of a Piece of Equipment

question 4

Multiple Choice

Southport Company is considering the purchase of a piece of equipment that costs $100,000.The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life.Assuming a tax rate of 40%,what is the annual amount of the depreciation tax shield provided by this investment?

• A) $4,000
• B) $9,000
• C) $3,600
• D) None of these answers is correct.

---

Definitions:

Equity Financed

Refers to the method of raising capital by selling company shares to investors.

Market Price

The current value at which an asset or service may be traded in a public market.

Total Wealth

The sum of all financial assets and physical possessions that have a monetary value owned by an individual or organization.

Reverse Stock Split

A corporate action that reduces the number of a company's outstanding shares by combining them into fewer, proportionally more valuable shares.