Warning Industries Is Considering Two Alternative Ways to Depreciate a Proposed

question 158

Multiple Choice

Warning Industries is considering two alternative ways to depreciate a proposed investment.The investment has an initial cost of $100,000 and an expected five-year life.The two alternative depreciation schedules follow:
$\begin{array}{llc}&\underline{\text { Method 1 }}&\underline{\text { Method2}} \\\text { Year } 1 \text { depreciation } & \$20,000&\$40,000 \\\text { Year 2 depreciation } & \$ 20,000 & \$ 30,000 \\\text { Year 3 depreciation } & \$ 20,000 & \$ 20,000 \\\text { Year 4 depreciation } & \$ 20,000 & \$ 10,000 \\\text { Year 5 depreciation } & \$ 20,000 & \$ 0\end{array}$

Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent,what is the difference between the two methods in the present value of the depreciation tax benefit? Present value tables or a financial calculator are required.

• A)$7,196
• B)$0
• C)$2,878
• D)$6,342

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Definitions:

Habitat Destruction

The process by which natural habitat is rendered unable to support the species present, leading to reduced biodiversity.

Commercial Harvesting

The large-scale collection of resources from nature, such as fish or timber, for commercial purposes.

Habitat Fragmentation

The division of habitats that formerly occupied large, unbroken areas into smaller pieces by roads, fields, cities, and other human land-transforming activities.

Specialized Feeding

The adoption of unique feeding strategies and mechanisms by certain organisms to suit their environmental conditions and nutritional requirements.