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 second 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 is calculated using the depreciation expense for the year and the tax rate. For a 3-year asset, the MACRS (Modified Accelerated Cost Recovery System) depreciation rates are typically 33.33% for the first year, 44.45% for the second year, and 14.81% for the third year. For the second year, the depreciation expense is $30,000 * 44.45% = $13,335. The tax shield is then $13,335 * 25% = $3,333.75.

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