A biotech company has an effective income tax rate of 40 The

A biotech company has an effective income tax rate of 40%. The company must choose one of the following mutually exclusive cryogenic freezers for its tissue samples. The after - tax MARR is 12% per year. Which freezer should be selected based on after- tax present worth?

Solution

Straight Line Depreciation Method

The straight line depreciation method calculates depreciation expense by spreading the cost of the fixed asset evenly over the life of that asset.

Depreciation Calculation without Salvage Value

To calculate depreciation expense on a fixed asset without a salvage value the cost is divided by the life.

SL = Cost / Life

Example: A table is purchased for $11000. The expected life is 5 years.

Calculate the annual depreciation as follows:

$11000/ 5 = $2200

Each year for 5 years $2200 would be expensed. At the end of 5 years the book value of the asset would be zero. (The cost of $2000 less 5 years of depreciation expense at $2200 per year.)

MACRS

MACRS stands for modified accelerated cost recovery system. It is the current system allowed in the United States to calculate tax deductions on account of depreciation for depreciable assets (other than intangible assets). IRS Form 4562 is used to claim depreciation deduction.

It allows a larger deduction in early years and lower deductions in later years when compared to the straight-line method.

There are two sub-system of MACRS: the general depreciation system (GDS) and alternate depreciation system (ADS). GDS is the most relevant and is used for most assets.

Formulas

Depreciation in 1st Year =

Cost ×

1

× A × Depreciation Convention

Useful Life

Depreciation in Subsequent Years =

(Cost Depreciation in Previous Years) ×

1

× A

Recovery Period

Where,
A is 100% or 150% or 200%.

$33000 X 1/5 X 100

However, where the depreciation calculated using the above formula is lower than depreciation under straight line method, the straight line depreciation for the previous year is taken as the relevant depreciation deduction for the rest of the recovery period.

Freeze 2 should be selected.

Depreciation in 1st Year =
Cost ×	1	× A × Depreciation Convention
Useful Life