Your firm needs a computerized machine tool lathe which costs $50,000, requires $10,000 in installation, $5,000 in freight charges and another $12,000 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 30% and a discount rate of 12%. Calculate the depreciation tax shield for this project in year 1.

Question

Quizplus · Accepted Answer

The depreciation tax shield is calculated by multiplying the depreciation expense by the tax rate. For MACRS 3-year property, the first-year depreciation rate is 33.33%. The total cost of the machine is $65,000 ($50,000 + $10,000 + $5,000). The first-year depreciation is $65,000 * 33.33% = $21,664.50. The tax shield is $21,664.50 * 30% = $6,499.35.

Your Firm Needs a Computerized Machine Tool Lathe Which Costs