In: Finance
Seeing Red has a new project that will require fixed assets of $905,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company has a tax rate of 34 percent. What is the depreciation tax shield for Year 3?
Solution :
Calculation of Depreciation for Year 3 :
The formula for calculating the MACRS Depreciation for a given year is
= Cost of Fixed Assets * MACRS Depreciation rate for a given year
As per the Information given in the question we have
Cost of Fixed Assets = $ 905,000 ; MACRS Depreciation rate for year 3 = 19.20 %
Applying the above information in the formula we have Depreciation for Year 3 is
= $ 905,000 * 19.20 %
= $ 173,760
Thus Depreciation for year 3 = $ 173,760
Calculation of depreciation tax shield for Year 3:
The annual Value of the Depreciation Tax Shield is calculated as follows
= Annual Value of Depreciation * Tax Rate
As per the Information given in the question we have
Thus Depreciation for Year 3 = $ 173,760 ; Tax Rate = 34 % = 0.34
Thus, depreciation tax shield for Year 3 is
= $ 173,760 * 0.34
= $ 59,078.40
The Depreciation Tax shield for Year 3 = $ 59,078.40
= $ 59,078 ( when rounded off to the nearest dollar amount )