Information about a project Dalwhinnie Company is considering is as follows: $\begin{array}{lr}
\text { Investment } & \$ 1,500,000 \
\text { Revenues } & \$ 700,000 \
\text { Variable costs } & \$ 140,000 \
\text { Fixed out-of-pocket costs } & \$ 80,000 \
\text { Cost of capital } & 12 \% \
\text { Tax rate } & 40 \%
\end{array}$ The property is considered 5-year property for tax purposes. The company plans to use MACRS and dispose of the property at the end of the sixth year. No salvage value is expected. Assume all cash flows occur at the end of the year. Round amounts to dollars.
The tax savings from depreciation in Year 2 would be

Question

Quizplus · Accepted Answer

To calculate the tax savings from depreciation in Year 2 using MACRS, we first need to determine the depreciation rate for Year 2 for 5-year property, which is 32%. The initial investment is $1,500,000. The depreciation expense for Year 2 is 32% of $1,500,000 = $480,000. The tax savings from depreciation is calculated as the depreciation expense multiplied by the tax rate: $480,000 * 40% = $192,000.

Information About a Project Dalwhinnie Company Is Considering Is as Follows