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

Question

Quizplus · Accepted Answer

The cost of the machine is $50,000 + $10,000 + $5,000 = $65,000.
The MACRS depreciation rate for a 3-year asset is 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4 and onward. So, the depreciation in year 1 is:
Depreciation = $65,000 x 33.33% = $21,665.50
The depreciation tax shield in year 1 is:
Depreciation tax shield = $21,665.50 x 30% = $6,499.35.

Therefore, the answer is A, $6,499.35.

Your Firm Needs a Computerized Machine Tool Lathe That Costs