Local Construction Company is considering the purchase of a bulldozer for $280,000. The expected life is four years. The company is comparing the depreciation tax shield using MACRS versus the straight-line method. If MACRS is used, the MACRS life is three years with a depreciation rate of 200 percent annually. Regardless of the method of depreciation used, the mid-year convention will be observed. The company's tax rate is 40 percent. The straight-line method assumes mid-year convention, and the cost of capital is 14 percent.
Required: (Round all calculations to the nearest dollar.)
a. Calculate the tax savings from depreciation for each year using both the MACRS and straight- line methods.
b. Calculate the present value of the tax savings for both depreciation methods.
c. Which method should be used to minimize the firm's tax liability? Why?

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The Answer of Local Construction Company is considering the purchase of a bulldozer for $280,000. The expected life is four years. The company is comparing the depreciation tax shield using MACRS versus the straight-line method. If MACRS is used, the MACRS life is three years with a depreciation rate of 200 percent annually. Regardless of the method of depreciation used, the mid-year convention will be observed. The company's tax rate is 40 percent. The straight-line method assumes mid-year convention, and the cost of capital is 14 percent.
Required: (Round all calculations to the nearest dollar.)
a. Calculate the tax savings from depreciation for each year using both the MACRS and straight- line methods.
b. Calculate the present value of the tax savings for both depreciation methods.
c. Which method should be used to minimize the firm's tax liability? Why?

Local Construction Company Is Considering the Purchase of a Bulldozer