Question

A firm is considering purchasing an asset that will cost $5 million. Other depreciable costs include $800,000 in installation costs. If the asset is classified in the 5-year class, what is the annual depreciation for years 1, 3, and 6 for this asset, using the fixed depreciation percentages given by MACRS? (The percentages are 20.00%, 19.20%, and 5.76%, respectively.

a. $1,160,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively

b. $1,856,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively

c. $1,160,000, $1,113,600, and $668,160 for years 1, 3, and 6, respectively

d. $5,800,000, $1,160,000, and $1,113,600 for years 1, 3, and 6, respectively

Answer 1

The annual depreciation expenses is calculated as follows

Annual Depreciation Expense = Cost of the asset x Depreciation percentages under MACRS

Cost of the asset = Purchase price of the asset + Installation Costs

= $50,00,000 + $800,000

= $58,00,000

Depreciation Expense for Year 1 = $11,60,000 [$58,00,000 x 20%]

Depreciation Expense for Year 3 = $11,13,600 [$58,00,000 x 19.20%]

Depreciation Expense for Year 6 = $334,080 [$58,00,000 x 5.76%]

“Hence, the answer would be (a). $1,160,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively”