Question

Suppose that a project has a depreciable investment of $600,000 and falls under the following accelerated depreciation schedule for tax purposes (standard linear depreciation in the books): 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. Tax rate is 35%. Calculate the annual depreciation schedule and depreciation tax-shield.

Answer 1

Depreciation rates 16.67% 16.67% 16.67% 16.67% 16.67% 16.67%

(books)

Depreciation $100000 $100000 $100000 $100000 $100000 $100000

(books)

Depreciation $35000 $35000 $35000 $35000 $35000 $35000

tax shield (books)

Depreciation rate 20% 32% 19.20% 11.50% 11.50% 5.80%

(tax)

Depreciation $120000 $192000 $115200 $69000 $69000 $34800

(tax)

Depreciation $42000 $67200 $40320 $24150 $24150 $12180

tax shield (tax)