Question

In: Finance

Seeing Red has a new project that will require fixed assets of $905,000, which will be...

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?

Solutions

Expert Solution

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 )


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