leisure vacations is considering a project which will require the purchase of $1.4 million in new 5-year macrs equipment the macrs rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for years 1 to 6, respectively. the firm desires a minimal 14 percent rate of return and the tax rate is 34 percent. what is the value of the depreciation tax shield in year 2 of the project

while a business enterprise perform a sale of a long time asset, if the sales value is better than the book cost, it have to pay taxes for the diference.

So this definition sets the method:

( salvage - e book fee ) x tax fee = tax expense in the sale

so the salvage fee after tax may be:

salvage cost - tax rate

Resuming

salvage cost - (salavage fee - e book cost) x tax rate = after tax salvage cost

Now shifting to this precise question:

The property is being bought at the stop of the challenge, which menas at 12 months 5. the use of the MACRS you may determinate every year depreciation, you want to recognize the book value at the give up of yr 5

yr rate Depreciation price book value

1 20% $280.000 $1.120.000

2 32% $448.000 $672.000

3 19.2% $268.800 $403.200

4 11.52% $161.280 $241.920

5 11.52% $161.280 $80.640

6 5.76% $80.640

We got that the ebook price at 12 months 5 is $eighty.640 and we additionally understand that the salvage price estimated is for $225,000 and the tax charge will be of 34%

Now we calculate with the preceding formulation:

225,000 - (225,000 - 80640) x 34% = $175,917.60

The favored rate of go back is not used on this calculation because this is use to determinate if an investment can yield that charge. right here we work with the statistics of the way much will the asset will worth after the fifth 12 months being the taxes paid. The 14% can be use to determinate wether it's far convinient or no longer to do the challenge.

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