Problem:
McElroy Carousel Horses is considering adding a new product line that will require an initial investment of $407,000 in fixed assets and that will be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The project is expected to increase annual sales by $338,000 and annual cash expenses by $184,000. The company has a marginal tax rate of 32 percent.
Requirement:
Question: What is the annual value of the depreciation tax shield?
A. $5,120
B. $13,160
C. $25,840
D. $32,560
E. $41,840
Note: Please explain comprehensively and give step by step solution.