Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 3?
A) $7,219.88
B) $24,500.00
C) $15,550.50
D) $48,132.50

Question

Quizplus · Accepted Answer

The depreciation tax shield in year 3 can be calculated using the MACRS depreciation rates and the tax rate. For a three-year class life under MACRS, the depreciation rates are 33.33% for year 1, 44.45% for year 2, and 14.81% for year 3. The depreciation expense in year 3 is 14.81% of $500,000, which equals $74,050. The tax shield is the depreciation expense multiplied by the tax rate, so $74,050 * 21% = $15,550.50.

Your Firm Needs a Machine Which Costs $500,000, and Requires