Massive Amusements,an owner of theme parks,invests $60 million to build a roller coaster.This can be depreciated using the MACRS schedule shown above.How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7-year,straight-line depreciation,if the tax rate is 40%?

Question

Quizplus · Accepted Answer

The depreciation schedule for the 7-year straight-line method is (cost - salvage value)/useful life = ($60 million - $0)/7 years = $8.57 million per year.

The depreciation schedule for the MACRS method is as follows:

Year 1: 20% = $12.00 million
Year 2: 32% = $19.20 million
Year 3: 19.20% = $11.52 million
Year 4: 11.52% = $6.91 million

The total depreciation for the first four years under MACRS is $49.63 million.

The difference in depreciation tax shield between the two methods for year 4 is:

($8.57 million - $6.91 million) x 40% = $0.66 million x 40% = $264,000 per year.

Therefore, the total difference in depreciation tax shield for the first four years is:

($8.57 million x 4 - $49.63 million) + ($264,000 x 3) = $1.285 million.

The correct answer is B).

Massive Amusements,an Owner of Theme Parks,invests $60 Million to Build