A firm is considering purchasing an asset that will cost $5 million. O

A firm is considering purchasing an asset that will cost $5 million. Other depreciable costs include $800,000 in installation costs.

If the asset is classified in the 5-year class, what is the annual depreciation for years 1, 3, and 6 for this asset, using the fixed depreciation percentages given by MACRS? (The percentages are 20.00%, 19.20%, and 5.76%, respectively.)
A) $1,856,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively
B) $1,160,000, $1,113,600, and $334,080 for years 1, 3, and 6, respectively
C) $1,160,000, $1,113,600, and $668,160 for years 1, 3, and 6, respectively
D) $5,800,000, $1,160,000, and $1,113,600 for years 1, 3, and 6, respectively

ANSWER

Answer: B
Explanation: B) The total depreciable value equals the asset cost plus installation costs. Adding these, we get $5 million plus $0.8 million = $5.8 million. The factor for year 1 is 20%. Thus, the depreciation for year 1 is: 0.2 × $5.8 million = $1,160,000. The factor for year 3 is 19.20%. Thus, the depreciation for year 3 is: 0.192 × $5.8 million = $1,113,600. The factor for year 6 is 5.76%. Thus, the depreciation for year 6 is: 0.0576 × $5.8 million = $334,080.