Use the following info: Tata Steel of India announced that it would spend EUR35

Question

Use the following info:

Tata Steel of India announced that it would spend EUR35 million in its Hayange, France steel mill to increase capacity to 340,000 metric tons from 300,000 metric tons per year in order to meet demand for a new railway contract. The expansion has an expected life of 10 years with a salvage value of EUR2 million. If a metric ton generates EUR280 in revenues against EUR120 in costs, fixed annual costs are EUR3 million, and the MARR is 15%, answer the following:

If the facility is to be depreciated with a five-year recovery period according to MACRS (DDB switching to SL with the half-year convention), what is the depreciation in year six?

(The answer is 2.02Million, but I don't understand why. Please show the work!)

Explanation / Answer

Initial Investment = EUR35 million

MACRS 5-year depreciation rates are as follow: 20.00%, 32.00%, 19.20%, 11.52%, 11.52% and 5.76%

Thus, it can be seen that rate of depreciation for last year is 5.76%. Please note that under MACRS, rates of depreciation are straight away applied without adjustment for any salvage value.

Hence, depreciation in year six = EUR35 million x 5.76%

= EUR2.016 million (Answer)

Ref. for MACRS 5-year Rates : http://seattlecentral.edu/faculty/moneil/Lectures/macrs.htm

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