Question

A certain asset was purchased at a cost of $2,700,000.  This company is in the 21% tax bracket.  Complete the lines below:

Year    MACRS %       Amount of Deprec   Amount of Deprec      Difference          Tax Effect

under MACRS            under straight line

1          .3333               ______________          ________________                   

2          .4444               ______________          ________________          _____________       _________

3          .1482               ______________          ________________                   

4          .0741               ______________

Answer 1

Depreciation expense under straight line = $ 675,000

Year	MACRS %	Amount of depreciation under MACRS	Amount of depreciation under staright line	Difference	Tax effect
1	0.3333	$899,910	$675,000	$224,910	$47,231.10
2	0.4444	$1,199,880	$675,000	$524,880	$110,224.80
3	0.1482	$400,140	$675,000	-$274,860	-$57,720.60
4	0.0741	$200,070	$675,000	-$474,930	-$99,735.30

From the above table, it can be concluded that MACRS depreciation method produces higher depreciation expense in year 1 and 2  than staright line method. Therefore using MACRS depreciation method will result in higher tax benefits in year 1 and 2.

In year 3 and 4, staright line method produces higher depreciation expense than MACRS method. As a result, continuing with MACRS method will result in higher taxable income and higher taxes to be paid. By switching over to staright line method in year 3 and 4, the firm can save total taxes of $157455.90 ( $ 57720.60 + $ 99735.30) .