Question

Year 0 14 29% Year 1 24.49% Year 2 17.49% Year 3 12.49% Year 4 8.93% Year 5 8.92% Year 6 8,93% Year 7 4.46% MACRS Depreciation Rate Massive Amusements, an owner of theme parks, invests $65 million to build a roller coaster. This can be depreciated using the MACRS schedule shown above. How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7-year, straight-line depreciation, if the tax rate is 35%? O A. $6,092,120 B. $1,218,424 OC. $974,739 OD. $2,193,163

Answer 1

OPTION B: $1,218,424

EXPLANATION:

for year 4

Tax shield under straight-line depreciation method = depreciation x tax rate

= ($65,000,000/7) x 35%

= $9,285,714.2857 x 35%

= $3,250,000

tax shield under MACRS depreciation method = depreciation x tax rate

= ($65,000,000 x 8.93%) x 35%

= $5,804,500 x 35%

= $2,031,576

Therefore depreciation under MACRS method is less than straight-line depreciation by = $3,250,000 - $2,031,576 = $1,218,424