MGMT 273 Fall Quiz: Chapter 9 Quiz Submt Qui This Question: 1 pt This Quiz: 13 p
ID: 2790277 • Letter: M
Question
MGMT 273 Fall Quiz: Chapter 9 Quiz Submt Qui This Question: 1 pt This Quiz: 13 pts a useful life of five years, and its marginal corporate tax rate is 35% The company plans to use straight line depreciation. a. What is the annual deprec b. What is the annual tax shield? should it choose? Why? e. How might your answer to part (d) change if Markov anticipates that its marginal corporate tax rate wil increase ciated with this equipment? a. What is the annual depreciation expense a b. What is the annual depreciation tax shield? Click to select your aExplanation / Answer
a. Annual depreciation expense = Cost of equipment / useful life of equipment
= 12.7million / 5 years = $2,540,000
b. Annual depreciation tax shield = $2,540,000 * tax rate 35% = $889,000
c. Deprecation tax shield based on MACRS depreciation:
Year
Depreciation rate
Depreciation expenses
Depreciation tax shield
0
20%
2,540,000
889,000
1
32%
4,064,000
1,422,400
2
19.20%
2,438,400
853,440
3
11.52%
1,463,040
512,064
4
11.52%
1,463,040
512,064
5
5.76%
731,520
256,032
d. In both cases the depreciation tax shield is the same. but under MACRS depreciation Tax shield receives sooner.
e. If tax rate increases, then it is better to claim higher depreciation expenses in later years thus with this we can get the tax benefit.
Year
Depreciation rate
Depreciation expenses
Depreciation tax shield
0
20%
2,540,000
889,000
1
32%
4,064,000
1,422,400
2
19.20%
2,438,400
853,440
3
11.52%
1,463,040
512,064
4
11.52%
1,463,040
512,064
5
5.76%
731,520
256,032
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.