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Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule: year 1: 20 percent; year 2: 32 percent; year 3: 19.2 percent; year 4: 11.5 percent; year 5: 11.5 percent; and year 6: 5.8 percent. Calculate the depreciation tax shield for year 2 using a tax rate of 30 percent.

Sagot :

Answer:

$96,000.

Explanation:

A depreciation tax shield is a method by which the tax paid reduces as a result of depreciation.

Depreciation in year 2 = 32%

Depreciation on equipment = $1,000,000 x 0.32 = $320,000

Depreciation tax shied = depreciation x tax = $320,000 x 0.3 = $96,000

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