. . press, present value of tax Mind Challenge, Inc., publishes innovative science textbooks for public schools. The company's man Problem 16-48 agement recently acquired the following two new pieces of equipment. MACRS Depreciation Presem Value of Tax Shield (Sec Computer-controlled printing press: cost, $250,000; considered to be industrial equipment tion 2) expected useful life, 12 years. (LO 16-4, 16-5) Duplicating equipment to be used in the administrative offices: considered to be office equipment Computer-controlled onning cost, 560,000; expected useful life, six years. shield: 554,095 The company uses straight-line depreciation for book purposes and the MACRS accelerated depre- ciation schedule for tax purposes. The firm's tax rate is 30 percent; its after-tax hurdle rate is 10 percent Neither machine has any salvage value. For each of the publishing company's new pieces of equipment: 1. Prepare a schedule of the annual depreciation expenses for book purposes. 2. Determine the appropriate MACRS property class. 3. Prepare a schedule of the annual depreciation expenses for tax purposes. 4. Compute the present value of the depreciation tax shield. (Round to the nearest dollar in each Required: MACRS Property Class Year 1 2 3 3-year 33.33% 44,45 14.810 7.41 5-year 20.00% 32.00 19.20 11,52 11.52 5.76 7-year 14.29% 24.49 17.49 12:49 893 8.92 893 446 Exhibit 16-9 Selected MACRS Depre ciation Percentages as Computed by the IRS (incor- porates half-year convention also incorporates recent modifications in the tax laws) 4 5 6 7 8 9 10 11 10-year 10.00% 18.00 14:40 11.52 9.22 7:37 6.55 6.55 6.56 6.55 3.28 Denotes the year during which the depreciation method twiches to the straight line method Source: RS Publication 946, entitled "How to Depreciate Property Depreciation Methods As Exhibit 16-8 indicates, assets in the 3-year, 5-year, 7-year, and 10-year MACRS property classes are depreciated using the double-declining-balance (DDB) method. Assets in the 15-year and 20-year MACRS property classes are Exhibit 16-8 ated using the 150%-declining-balance method. To apply this depreciation method, use Modified Accelerated Cost the same steps as those listed in Exhibit 16-7 for the DDB method, except change 2008 Recovery System (as modified depreciated using the straight-line method. in step (2) to 150%. Assets in the 27.5-year and 39-year MACRS property classes are by the Tax Reform Acts of 1986, 1989, and 1993): Consistent with the TCJA of Half-Year Convention An asset may be purchased at any time during the tax year. 2017 (see IRS Pub. 946 dated MACRS assumes that, on average, assets will be placed in service halfway through the 02/28/2018) tax year. Thus, the tax code allows only a half-year's depreciation during the tax year in (a) (b) Asset's Useful Life Types of Assets in MACRS Class Up to 4 years Industrial tools Between 4 and 10 years Automobiles, trucks, office equipment, computers, research equipment Between 10 and 16 years Most industrial equipment and machinery, office furniture Between 16 and 20 years Equipment and machinery for specified purposes Between 20 and 25 years Land improvements, some industrial machinery 25 years or longer Specified real property, such as farm buildings in the tax iw, an asset's useful life is referred to as the Asset Depreciation Range (ADR) Midpoint Life MACRS Class and Depreciation Method 3-year class, double-dedining-balance 5 year class double-declining balance 7 year class; double-ceclining balance 10-year class, double-declining-balance 15-year class: 150%-declining balance 20 year class, 150%-declining balance Year Straight-Line Depreciation for Book Purposes MACRS Depreciation Cash Flow Tax Savings Discount Factor Present Value 1 Format for 1 or 3 X 2 3 4 5 NE 6 Present value of tax shield Year Straight-Line Depreciation for Book Purposes MACRS Depreciation Cash Flow Tax Savings Discount Factor Present Value 1 2 3 4 5 This format please 6 7 8 9 10 11 12 Present value of tax shield