Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 60

Value of Accelerated Depreciation Freedom Corporation acquired a fixed asset for $100,000. Its estimated life at time of purchase was four years, with no estimated salvage value. Assume a discount rate of 8 percent and an income tax rate of 40 percent.

Required

1. What is the present value of the tax benefits resulting from calculating depreciation using the sum-of-the-years’-digits method as opposed to the straight-line method on this asset?

---

2. What is the present value of the tax benefits resulting from calculating depreciation using the double-declining-balance method as opposed to straight-line method on this asset?

---

3. What is the present value of the tax benefits resulting from using MACRS as opposed to straight-line depreciation? The asset qualifies as a three-year asset. Use the half-year convention.

Step 1 of 11

Depreciation:

Every asset that is purchased will have a life expectancy. Over its life expectancy, cost is allotted for the asset by a method which is called as depreciation. The value of an asset will be used up a period of time and this is represented by depreciation. It also enables an organization to write off the value of the asset over its useful life.