Information about a project Darcy Company is considering is as follows:

Investment $1,000,000
Revenues $700,000
Variable costs $140,000
Fixed out-of-pocket costs $80,000
Cost of capital 12%
Tax rate 40%


The property is considered 5-year property for tax purposes. The company plans to use MACRS and dispose of the property at the end of the sixth year. No salvage value is expected. Assume all cash flows occur at the end of the year. Round amounts to dollars.

The tax savings from depreciation in Year 2 would be

To calculate the tax savings from depreciation in Year 2, we need to first determine the depreciation expense for Year 2 using the MACRS method, and then calculate the tax savings based on that depreciation expense.

Step 1: Calculate the depreciation expense for Year 2 using MACRS.
Since the property is considered 5-year property for tax purposes and we are at Year 2, the depreciation rate for Year 2 can be found in the MACRS depreciation table.

According to the MACRS table, the depreciation rate for 5-year property in Year 2 is 32%.

Depreciation Expense for Year 2 = Depreciation Rate * Investment
Depreciation Expense for Year 2 = 0.32 * $1,000,000
Depreciation Expense for Year 2 = $320,000

Step 2: Calculate the tax savings from depreciation in Year 2.
The tax savings from depreciation can be calculated by multiplying the depreciation expense by the tax rate.

Tax Savings from Depreciation in Year 2 = Depreciation Expense for Year 2 * Tax Rate
Tax Savings from Depreciation in Year 2 = $320,000 * 40%
Tax Savings from Depreciation in Year 2 = $128,000

Therefore, the tax savings from depreciation in Year 2 would be $128,000.