Van Meter Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes:
Acquisition cost $500,000
Annual cash flow $180,000
Annual operating costs $30,000
Expected salvage value $-0-
Cost of capital 12%
Tax rate 40%
Van Meter plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.)
The MACRS deduction in Year 2 would be
To calculate the MACRS deduction in Year 2, you need to follow a few steps:
Step 1: Determine the MACRS depreciation rate.
For 5-year property, the MACRS depreciation rates are as follows:
Year 1: 20.00%
Year 2: 32.00%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%
Step 2: Calculate the depreciable basis.
The depreciable basis is the acquisition cost minus the expected salvage value. In this case, the expected salvage value is $0, so the depreciable basis is $500,000.
Step 3: Calculate the MACRS deduction in Year 2.
To calculate the MACRS deduction in Year 2, you multiply the depreciable basis by the MACRS depreciation rate for Year 2.
MACRS deduction in Year 2 = Depreciable basis * MACRS depreciation rate for Year 2
MACRS deduction in Year 2 = $500,000 * 32.00%
MACRS deduction in Year 2 = $500,000 * 0.32
MACRS deduction in Year 2 = $160,000
Therefore, the MACRS deduction in Year 2 would be $160,000.