Equipment associated with manufacturing small railcars had a first cost of $150,

Question

Equipment associated with manufacturing small railcars had a first cost of $150,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $634,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 37%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be $ .

Explanation / Answer

Depreciation as per straight line method =[cost-salvage]/useful life

                          = [ 150000-30000]/5

                         = 120000/5

                          =$ 24000

Depreciation as per MACRS :Cost*depreciation rate

                  = 150000* .32

                   = $ 48000

Difference in Depreciation = 48000-24000 =24000

Difference in taxes paid is   24000 *.37 =$ 8880

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