Van Meter Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes:

Acquisition cost $500,000
Annual cash flow $180,000
Annual operating costs $30,000
Expected salvage value $-0-
Cost of capital 12%
Tax rate 40%


Van Meter plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.)

The MACRS deduction in Year 2 would be

To calculate the MACRS deduction in Year 2, we need to determine the depreciation expense using the MACRS depreciation method. MACRS stands for Modified Accelerated Cost Recovery System, and it is a method of depreciation allowed by the Internal Revenue Service (IRS) for tax purposes.

Step 1: Determine the MACRS depreciation method for the asset.
In this case, the computer equipment is considered 5-year property, so we will use the 5-year MACRS depreciation method.

Step 2: Determine the depreciation rate for Year 2.
The MACRS depreciation rates for 5-year property are as follows:
- Year 1: 20%
- Year 2: 32%
- Year 3: 19.2%
- Year 4: 11.52%
- Year 5: 11.52%
- Year 6: 5.76%
- Year 7: 5.76%

Since we are calculating the MACRS deduction for Year 2, we will use the depreciation rate of 32%.

Step 3: Calculate the MACRS depreciation expense for Year 2.
To calculate the MACRS depreciation expense, we multiply the acquisition cost of the equipment by the depreciation rate for Year 2.

MACRS depreciation expense for Year 2 = Acquisition cost * Depreciation rate for Year 2

In this case,
Acquisition cost = $500,000

MACRS depreciation expense for Year 2 = $500,000 * 32% = $160,000

Therefore, the MACRS deduction in Year 2 would be $160,000.