A company that utilizes the MACRS system of depreciation:
A)will have equal depreciation costs each year of an asset's life.
B)will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.
C)can depreciate the cost of land, if it so desires.
D)will expense less than the entire cost of an asset.
E)cannot expense any of the cost of a new asset during the first year of the asset's life.

Question

Quizplus · Accepted Answer

The MACRS system of depreciation front-loads the depreciation expense, which means that the tax shield in year two of a project will be greater than it would have been under straight-line depreciation, given the same depreciation life. This is because the bulk of the depreciation expense is taken in the early years of the asset's life, resulting in higher tax savings. Option A is incorrect because MACRS depreciation expenses are not equal each year. Option C is incorrect because land is not depreciable. Option D is incorrect because MACRS allows for full expensing of the asset over its useful life, although the timing of the deductions and the percentage of the value that can be depreciated each year may vary. Option E is incorrect because the MACRS system allows for a portion of the cost of the asset to be expensed in the first year.

A Company That Utilizes the MACRS System of Depreciation