Your firm needs a computerized machine tool lathe which costs $44,000 and requir
ID: 2780086 • Letter: Y
Question
Your firm needs a computerized machine tool lathe which costs $44,000 and requires $11,400 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 35 percent and a discount rate of 11 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 $44,000 and requires $11,400 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 35 percent and a discount rate of 11 percent.
Explanation / Answer
Depreciation in year 3 will be 14.81% × $44,000 = $6,516.4. This will save the firm $6,516.4 × .35 = $2,280.74 in taxes.
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