Question

Mr. Hiramatsu bought a new $50,000 freezer for his grocery store on January 2, 2013. The freezer has a 5-year economic life and recovery period, Mr. Hiramatsu’s required rate of return is 12%, and his tax rate is 40%.
1. Suppose Mr. Hiramatsu uses straight-line depreciation for tax purposes. Compute the PV of the tax savings from depreciation. Assume that Mr. Hiramatsu takes a full year of depreciation at the end of 2013.
2. Suppose Mr. Hiramatsu uses MACRS depreciation for tax purposes. Compute the PV of the tax savings from depreciation.
3. Suppose Mr. Hiramatsu was allowed to immediately deduct the entire cost of the freezer for tax purposes. Compute the PV of the tax savings from depreciation.
4. Which of the three methods of deducting the cost of the freezer would Mr. Hiramatsu prefer if all three were allowable for tax purposes? Why?



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  • CreatedNovember 19, 2014
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