Question

Trenton Fabrication Company purchased industrial tools costing $230,000, which fall in the 3-year property class under MACRS.

Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.). (Round your final answers to the nearest dollar amount.)

Required:

1. Prepare a schedule of depreciation deductions assuming:

a. The firm uses the accelerated depreciation schedule specified by MACRS

b. The firm uses the optional straight-line depreciation method and the half-year convention.

2. Calculate the present value of the depreciation tax shield under each depreciation method listed in part (1). Trenton Fabrication Company’s after-tax hurdle rate is 12 percent, and the firm’s tax rate is 30 percent.

Answer 1

1)
a)	Depreciation under MACRS 7 is calculated below for years 1 to 4, with half year convention:
	Year 1	Depreciation %	Depreciation
	1	33.33	$          76,659
	2	44.45	$      1,02,235
	3	14.81	$          34,063
	4	7.41	$          17,043
	Total depreciation		$      2,30,000
	Annual depreciation = 230000/3 =			$           76,667
b)	Depreciation for 1st year and last year = 57500/2 =			$           38,333
	Year 1	Depreciation
	1	$               38,333
	2	$               76,667
	3	$               76,667
	4	$               38,333
	Total depreciation	$           2,30,000
2)	Year 1	MACRS
		Depreciation	Tax shield at 30%	After tax depreciation	PVIF at 12%	PV at 12%
	1	$               76,659	$          22,998	$           53,661	0.89286	$            20,534
	2	$           1,02,235	$          30,671	$           71,565	0.79719	$            24,450
	3	$               34,063	$          10,219	$           23,844	0.71178	$               7,274
	4	$               17,043	$            5,113	$           11,930	0.63552	$               3,249
	Total	$           2,30,000	$          69,000	$       1,61,000		$            55,507
	PV OF DEPRECIATION TAX SHIELD-MACRS			$           55,507
		Straight line
		Depreciation	Tax shield at 30%	After tax depreciation	PVIF at 12%	PV at 12%
	1	$               38,333	$          11,500	$           26,833	0.89286	$            10,268
	2	$               76,667	$          23,000	$           53,667	0.79719	$            18,335
	3	$               76,667	$          23,000	$           53,667	0.71178	$            16,371
	4	$               38,333	$          11,500	$           26,833	0.63552	$               7,308
		$           2,30,000	$          69,000	$       1,61,000		$            52,283
	PV OF DEPRECIATION TAX SHIELD-STRAIGHT LINE			$           52,283