Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%.
Calculate the depreciation tax shield for year 2 using a tax rate of 30%:
A)$224,000.
B)$60,000.
C)$96,000.
D)$300,000.

Question

Quizplus · Accepted Answer

To calculate the depreciation tax shield for year 2, we need to use the MACRS year 5 depreciation schedule, which has a year 2 depreciation rate of 32%. The depreciation tax shield is calculated by multiplying the depreciable investment by the depreciation rate, which gives us:
Depreciation tax shield = $1,000,000 × 32% = $320,000
Since the tax rate is 30%, we multiply the tax shield by the tax rate to get the tax savings:
Tax savings = $320,000 × 30% = $96,000
Therefore, the correct answer is C, $96,000.

Suppose That a Project Has a Depreciable Investment of $1,000,000