Jain's Pharmaceuticals is installing new lab equipment at a cost of $5 million with an economic life of 5 years. Jain's marginal tax rate is 35%. What is the difference in depreciation between straight line depreciation and MACRS depreciation in the second year.
A) $0.6 million
B) $1 million
C) $1.6 million
D) $1.75 million

Question

Quizplus · Accepted Answer

Under straight-line depreciation, the annual depreciation expense is the cost of the asset divided by its useful life. For a $5 million asset with a 5-year life, this equals $1 million per year. MACRS (Modified Accelerated Cost Recovery System) allows for faster depreciation in the early years of an asset's life. In the second year, MACRS for 5-year property prescribes a 32% depreciation rate. Thus, the second-year depreciation under MACRS is $5 million * 32% = $1.6 million. The difference between the two methods in the second year is $1.6 million (MACRS) - $1 million (straight-line) = $0.6 million.

Jain's Pharmaceuticals Is Installing New Lab Equipment at a Cost