Homework Answers
Assume a income before depreciation and taxes of $500,000.
Double declining rate = 1/8 * 2= 25%
Depreciation charge under double declining rate = $ 1,000,000 * 25% = 250,000
Taxable income= 500,000 - 250,000 = 250,000
taxes paid = 250,000 * (40%) = 100,000
If straight line method is used , depreciation charge = 1,000,000 /8 = 125,000
Taxable income = 500,000 - 125,000 = 375000
Income after taxes = 375,000 * 40%=150,000
The cash flow to the owner increases by $50,000 if double declining method is opted. This is due to higher depreciation charge as per the method.
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