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Question 13.EX.2: CHANGE IN DEPRECIATION Suppose the Inter.Com Company is eval...

CHANGE IN DEPRECIATION

Suppose the Inter.Com Company is evaluating its depreciation methods on a new piece of equipment that costs $100,000. And suppose the equipment can be depreciated using straight-line over five years or treating it as a 3-year MACRS asset. What is the difference in the cash flows associated with depreciation under these two methods in the second year if its marginal tax rate is 40%?

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Difference in depreciation = $20,000 – 44,450 = $24,450

Tax shield of difference = 0.40 × $24,450 = $9,780

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