Problem: ACRS, NPV
Lilly Company is planning to buy a set of special tools for its grinding operation. The cost of the tools is $18,000. The tools have a three-year life and qualify for the use of the three-year MACRS. The tax rate is 25 percent; the cost of capital is 12 percent.
You must use the Exhibit 19B.1 and Exhibit 19B.2 present value tables and Exhibit 19.5 to solve the following problems.
Task
A. Calculate the present value of the tax depreciation shield, assuming that straight-line depreciation with a half-year life is used.
B. Calculate the present value of the tax depreciation shield, assuming that MACRS is used.
C. What is the benefit to the company of using MACRS?
More income can be reported on the income statement for the periodMACRS generates more depreciation tax savings over the life of the assetMACRS increases the amount of depreciation tax savings in the earlier yearsMACRS increases the amount of depreciation tax savings in the earlier years