Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: Old Machine New Machine Cost $40,000 Cost $19,000 Accumulated depreciation $20,000 Estimated useful life 4 years Remaining life 4 years Salvage value in 4 years $5,000 Current salvage value $5,000 Annual cash operating costs $14,000 Salvage value in 4 years $-0- Annual cash operating costs $18,000 The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 20x1, $5,700 in 20x2, $3,800 in 20x3, and $1,900 in 20x4. Assume Bailey would purchase the new machine in December 20x0 and dispose of the old machine in January 20x1. 34. Baileys 20x0 depreciation tax shield for the old machine is a. $5,000 b. $4,000 c. $3,000 d. $2,000 I am not sure if what I am doing it right, but the way I do it is: Take current book value: 20,000 / 4 = 5000, then multiply by (1-taxrate) (.6) to get = 3,000 (C) Am i doing this correct? also can you explain the detail of what a tax shield? Thanks