CMA Final · Strategic Financial Management · Leasing Decisions
Bharat Pharma evaluates a lease versus buy. Purchase price of equipment is Rs 5,00,000, depreciated straight-line over 5 years to nil, tax rate 40%. What is the annual depreciation tax shield if the equipment is bought?
The annual depreciation tax shield is Rs 40,000. Straight-line depreciation is Rs 1,00,000 a year on Rs 5,00,000 over five years, and multiplying by the 40% tax rate gives the tax saved each year.
- ARs 40,000Correct
- BRs 1,00,000
- CRs 60,000
- DRs 2,00,000
Explanation
Annual depreciation = 5,00,000/5 = 1,00,000. Tax shield = 1,00,000 x 40% = Rs 40,000. Rs 60,000 wrongly uses (1-t).
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