You work for a natural gas pipeline company; it has just spent $150,000,000 (fix

Question

You work for a natural gas pipeline company; it has just spent $150,000,000 (fixed capital investment) building a new pipeline network that it plans to operate for 30 years. Assume that this entire expense is fully depreciable. Your company CEO wants to know whether it is worthwhile to use the MACRS depreciation schedule, or straight-line depreciation is better. Using the recovery periods listed below, calculate the net present worth of the tax savings associated with both schemes.   Your CEO expects a 15% return on all investments.

Recovery period for MACRS = 15 yrs

Recovery period for straight-line = 22 years

Explanation / Answer

As NPV of MACR is $5078434.95 more than NPV of SLD method it is advisable to use MACR method to calculate depreciation as it is giving the company substantial benefits

Calculation of NPV of Tax benefit by using MACRS method Asset Value $150,000,000 Suppose the tax rate is 30% Also the discount rate is 15% Depreciation 15-year Year Initial Book Value MACR rate Depreciation Tax Benefit Present value 5% 1 $150,000,000 5% $7,500,000 $2,250,000 1956521.74 9.50% 2 $150,000,000 9.50% $14,250,000 $4,275,000 3232514.18 8.55% 3 $150,000,000 8.55% $12,825,000 $3,847,500 2529793.70 7.70% 4 $150,000,000 7.70% $11,550,000 $3,465,000 1981125.00 6.93% 5 $150,000,000 6.93% $10,395,000 $3,118,500 1550445.65 6.23% 6 $150,000,000 6.23% $9,345,000 $2,803,500 1212030.42 5.90% 7 $150,000,000 5.90% $8,850,000 $2,655,000 998112.84 5.90% 8 $150,000,000 5.90% $8,850,000 $2,655,000 867924.21 5.91% 9 $150,000,000 5.91% $8,865,000 $2,659,500 755995.88 5.90% 10 $150,000,000 5.90% $8,850,000 $2,655,000 656275.39 5.91% 11 $150,000,000 5.91% $8,865,000 $2,659,500 571641.50 5.90% 12 $150,000,000 5.90% $8,850,000 $2,655,000 496238.48 5.91% 13 $150,000,000 5.91% $8,865,000 $2,659,500 432243.10 5.90% 14 $150,000,000 5.90% $8,850,000 $2,655,000 375227.59 5.91% 15 $150,000,000 5.91% $8,865,000 $2,659,500 326837.88 2.95% 16 $150,000,000 2.95% $4,425,000 $1,327,500 141862.98 Net Present value of Tax Benefits 18084790.55

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.