Your firm needs a machine which costs $50,000, and requires $2,000 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 10 percent. What is the depreciation tax shield for this project in year 3?

Question

Quizplus · Accepted Answer

The MACRS three-year class life percentages are 33.33%, 44.45%, 14.81%, and 7.41%. In year 3, the depreciation is 14.81% of $50,000, which is $7,405. The tax shield is the depreciation amount multiplied by the tax rate: $7,405 * 0.35 = $2,591.75.

Your Firm Needs a Machine Which Costs $50,000, and Requires