Question

1. A five- year asset with a depreciable base of 2,500,000 will be depreciated using 5-years MACRS. Construct a table showing annual depreciation, accumulated depreciation and asset’s book value for each year the asset is depreciated.

2. Use your answer to question 1 to answer this quesrion. Find the tax savings from depreciation in year 1,2 and 3. Why is there tax saving from deprecitation.

3. Assume that the asset in question 1 is sold for $500,000 in year five. Find the net salvage value.

please use .21 tax rate if needed.

please show formula and work

Answer 1

	Annual Depreciation =(Depreciable Base of asset)*( MACRS Depreciation Rate)
	Asset Depreciable base	$2,500,000
		A	B=A*2500000	C	D=2500000-C
	Year	5-Year MACRS	Annual	Accumulated	End of year
		Depreciation Rate	Depreciation	Depreciation	Book Value
	1	20%	$500,000	$500,000	$2,000,000
	2	32%	$800,000	$1,300,000	$1,200,000
	3	19.20%	$480,000	$1,780,000	$720,000
	4	11.52%	$288,000	$2,068,000	$432,000
	5	11.52%	$288,000	$2,356,000	$144,000
	6	5.76%	$144,000	$2,500,000	$0
	Total	100%	$2,500,000
2	Tax Saving From Depreciation
	Tax rate =21%=0.21
	Depreciation Tax shield =( Annual Depreciation)*(Tax Rate)
		B	E=B*0.21
	Year	Annual Depreciation	Depreciation Tax Shield
	1	$500,000	$105,000
	2	$800,000	$168,000
	3	$480,000	$100,800
	Depreciation is not a cash expense
	It does not affect the cash flow
	But,it is allowed as expense in the income statement
	Hence it reduces income and there is lower tax on lower income
	Example:
	Revenue	$100,000
	Expense	$75,000
	Profit(Before depreciation)	$25,000
	Tax (21%)	$5,250
	But ,the depreciation expense will reduce tax
	Depreciation expense	$15,000
	Profit(After depreciation)	$10,000	(100000-75000-15000)
	Tax (21%)	$2,100
	Saving in Tax due to depreciation	$3,150	(5250-2100)
	21% of depreciation=21%*15000	$3,150
3	End of Year 5 Book Value	$144,000
	Sales price	$500,000
	Gain on Sale	$356,000
	Tax Saving on sale =356000*21%	$74,760
	Net Salvage Value=500000+74760	$574,760