Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35% and a discount rate of 15%. What is the depreciation tax shield for this project in year 3?

Question

Quizplus · Accepted Answer

Using MACRS 3-year depreciation, the depreciation each year is:
Year 1: 33.33% x $500,000 = $166,650
Year 2: 44.45% x $500,000 = $222,250
Year 3: 14.81% x $500,000 = $74,050

The total depreciation over 3 years is $166,650 + $222,250 + $74,050 = $463,950.

The depreciation tax shield in Year 3 is equal to the depreciation multiplied by the tax rate, or $74,050 x 35% = $25,917.50.

Therefore, the answer is C, $25,917.50.

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