Your firm needs a machine which costs $100,000, and requires $25,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 35 percent and a discount rate of 14 percent. What is the depreciation tax shield for this project in year 3?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual depreciation expense using the MACRS three-year class life category. 
Year 1: 33.33% depreciation rate x $100,000 = $33,330
Year 2: 44.45% depreciation rate x $100,000 = $44,450
Year 3: 14.81% depreciation rate x $100,000 = $14,810

Next, we can calculate the depreciation tax shield for year 3:
Depreciation tax shield = depreciation expense x tax rate
Depreciation tax shield = $14,810 x 35% = $5,183.50

Therefore, option B is the best choice as it gives us the correct answer.

Your Firm Needs a Machine Which Costs $100,000, and Requires