Trenton Fabrication Company purchased industrial tools costing $170,000, which f

Question

Trenton Fabrication Company purchased industrial tools costing $170,000, 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.)

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.

Year Accelerated Depreciation 1 2 3 4

Explanation / Answer

a. Depreciation schedule if the firm uses the accelerated depreciation schedule specified by MACRS:

As the asset falls under the 3-year property class under MACRS, the straight line depreciation is 33.33% and the double declining accelerated depreciation rate is 66.67%.

a. Depreciation schedule if the firm uses the optional straight-line depreciation method and the half-year convention, under the 3-year property class under MACRS:

$95733

Year Depreciable Value Depreciation rate Depreciation Expense Tax Shield (0.70) Present Value discount rate 12% Present Value $ 1 170000 66.67% 113339 79337 0.893 70848 2 56661 66.67% 37776 26443 0.797 21075 3 18885 66.67% 12591 8814 0.712 6276 4 6294 66.67% 6294 4406 0.636 2802 Present Value= $101001

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