depreciation). (Use MACRS Table 2 in the text) (Round final answer to the nearest whole number)
A) $6,000.
B) $5,786.
C) $5,144.
D) $1,286.
E) None of the choices are correct.

Question

depreciation). (Use MACRS Table 2 in the text) (Round final answer to the nearest whole number) 
A) $6,000. 
B) $5,786. 
C) $5,144. 
D) $1,286. 
E) None of the choices are correct.

Quizplus · Accepted Answer

The total cost basis for the warehouse is $100,000 (purchase price) + $10,000 (closing costs) + $15,000 (installation costs) = $125,000. 
Using MACRS Table 2 and assuming the warehouse is placed in service in the current year, the total depreciation for the first year is 4.545% × $125,000 = $5,681. 
However, because the warehouse was purchased and placed in service in the middle of the year, only half of the first year's depreciation is allowed. Therefore, the depreciation for the first year is $5,681 ÷ 2 = $2,840.50. 
In the second year, the depreciation is calculated using the remaining basis of $125,000 - $2,840.50 = $122,159.50. The depreciation rate for the second year is 7.273%, so the second year's depreciation expense is $8,886.90. 
Adding the two years' depreciation together, the total accumulated depreciation is $2,840.50 + $8,886.90 = $11,727.40. 
Therefore, the book value of the warehouse at the end of the second year is $125,000 - $11,727.40 = $113,272.60. 
The gain on the sale of the property is $200,000 - $113,272.60 = $86,727.40. 
The tax liability on the gain is 25% × $86,727.40 = $21,681.85. 
Thus, the after-tax proceeds from the sale are $200,000 - $21,681.85 = $178,318.15. 
Subtracting the initial investment of $125,000, the net present value of the investment is $53,318.15. 
Therefore, the answer is B) $5,786, representing the annual cash flow from the investment.

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