Question

Suppose a firm could choose between the following 3 different depreciation schedules to depreciate a $100...

Suppose a firm could choose between the following 3 different depreciation schedules to depreciate a $100 investment. The required rate of return is 10% and your tax rate is 34%. All else equal (no risk, no other tax implications), which depreciation schedule maximizes firm value?

Depreciation

Schedule

Year 1

Year 2

Year 3

Year 4

MACRS

33.33%

44.45%

14.81%

7.41%

DCRS

7.41%

14.81%

44.45%

33.33%

Straight-line

25.00%

25.00%

25.00%

25.00%

Group of answer choices

Both MACRS and DCRS depreciation

Both DCRS and Straight-line depreciation

MACRS depreciation

Straight-line depreciation

DCRS depreciation

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Homework Answers

Answer #1

MACRS depreciation

Depreciation is a non cash expenses but it would help in reducing tax liability of the company thus maximizing firms value. as per time value of company the cash flow as early as possible will have higher value than the cash flow we receive in later periods. in MACRS depreciation we are depreciating first 2 years with high percentages which will give higher tax benefits in first two years than any other method. Thus MACRS depreciation is recommended

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