Suppose an asset is classified as a 3-year asset for tax purposes, but has a useful life of 5 years. If the asset has an initial cost of $30,000, the depreciation tax shield for the first year of the asset's useful life if the tax rate is 25 percent is closest to:

Question

Quizplus · Accepted Answer

The depreciation tax shield for the first year can be calculated using the Modified Accelerated Cost Recovery System (MACRS) depreciation method, which is commonly used for tax purposes in the United States. For a 3-year asset, the first-year depreciation rate is 33.33%. Therefore, the first-year depreciation expense is 33.33% of $30,000, which equals $9,999. The tax shield is the depreciation expense multiplied by the tax rate, so $9,999 * 25% = $2,499.75.

Suppose an Asset Is Classified as a 3-Year Asset for Tax