A firm is considering purchasing an asset that will cost $1 million. Other depreciable costs include $100,000 in installation costs

Question

If the asset is classified in the 3-year class, what is the annual depreciation for each year for this asset using the fixed depreciation percentages given by MACRS? (The percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively.)
A) $366,667, $366,667, $366,667 and $0 for years 1, 2, 3, and 4, respectively
B) $275,000, $275,000, $275,000, and $275,000 for years 1, 2, 3, and 4, respectively
C) $366,630, $488,950, $162,910, and $81,510 for years 1, 2, 3, and 4, respectively
D) $366,630, $488,950, $81,510, and $81,510 for years 1, 2, 3, and 4, respectively

Answer 1

Answer: C
Explanation: C) The total depreciable value equals the asset cost plus installation costs. Adding these, we get $1 million plus $0.1 million = $1.1 million. The factor for year 1 is 33.33%. Thus, the depreciation for year 1 is: 0.3333 × $1.1 million = $336,630. The factor for year 2 is 44.45%. Thus, the depreciation for year 1 is: 0.4445 × $1.1 million = $488,950. The factor for year 3 is 14.81%. Thus, the depreciation for year 3 is: 0.1481 × $1.1 million = $162,910. The factor for year 4 is 7.41%. Thus, the depreciation for year 4 is: 0.0741 × $1.1 million = $81,510. Summing the depreciation we get $1.1 million because all of the factors add up to 1.00 (or 100%).