(Depreciation choice) In the United States the accelerated cost recovery system (ACRS) must be used for depreciation of assets placed into service after December 1980. In this system, assets are classified into categories specifying the effective tax life. The classification of 3-year property, for example, includes automobiles, tractors for hauling highway trailers, light trucks, and certain manufacturing tools. The percentages of the cost for 3-year property that can be deducted for each of the first 3 years after purchase (including the year of purchase) are 25%, 38%, and 37%, respectively. The tax code also allows the alternate ACRS method, which for 3-year property means that the straight-line percentage of % can be used for 3 years.

Which of these methods is preferred by an individual who wishes to maximize the present value of depreciation? How does the choice depend on the assumed rate of interest?

33- 3