Your firm needs a computerized machine tool lathe which costs $45,000 and requir

Question

Your firm needs a computerized machine tool lathe which costs $45,000 and requires $11,500 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent.

Calculate the depreciation tax shield for this project in year 3. (Round your answer to 2 decimal places.)

Your firm needs a computerized machine tool lathe which costs $45,000 and requires $11,500 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 12 percent.

Explanation / Answer

Depreciation tax shield is the amount tax saved due to depreciation. For thsi we will caluclate depreciation in third year and multiplee it by tax rate. According to MACS 3 year the depreciation rat efo rthird year is 14.81%

Tax shield = 0.1481 x 45000 x 0.34

Depreciation tax shield = $2265.93

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