Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20 percent; year 2: 32 percent; year 3: 19.2 percent; year 4: 11.5 percent; year 5: 11.5 percent; and year 6: 5.8 percent.
Calculate the depreciation tax shield for year 2 using a tax rate of 30 percent.
A)$224,000
B)$60,000
C)$96,000
D)$300,000

Question

Quizplus · Accepted Answer

The depreciation expense for year 2 can be calculated as:
Depreciation expense = Investment * depreciation rate = $1,000,000 * 32% = $320,000
The depreciation tax shield is the tax savings resulting from the depreciation expense, which is given by:
Depreciation tax shield = Depreciation expense * Tax rate = $320,000 * 30% = $96,000

Therefore, the answer is C, and the depreciation tax shield for year 2 is $96,000.

Suppose That a Project Has a Depreciable Investment of $1,000,000