Suppose a Machine That Costs $80,000 Has a Useful Life

question 13

Multiple Choice

Suppose a machine that costs $80,000 has a useful life of 10 years. Also suppose that depreciation on the machine is $8,000 for tax purposes in year 4. The tax rate is 40%. The tax savings from the depreciation tax shield in year 4 would be:

• A) $4,800 inflow
• B) $3,200 inflow
• C) $4,800 outflow
• D) $3,200 outflow

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Definitions:

Lower-of-cost-or-market

An accounting principle that values inventory at the lower of its historical cost or current market price.

Average Cost

A method of inventory valuation that calculates the cost of goods sold and ending inventory based on the weighted average of all units purchased.

Costing Method

a technique or methodology used to determine the cost associated with a production process or project.