A chemical company bought a small vessel for $550,000; it is to be depreciated by 10-year MACRS. When requirements changed suddenly, the chemical company leased the vessel to an oil company for 6 years at $100,000 per year. The lease also provided that the oil company could buy the vessel at the end of 6 years for $350,000. At the end of the 6 years, the oil company exercised its option and bought the vessel. The chemical company has a 24% combined incremental tax rate. Compute its after-tax rate of return on the vessel.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Part 1: A chemical company bought a small vessel for $550,000; it is to be
Part 2: Then, assuming that a $1,000,000 Section 179 deduction and a 60% bonus depreciation deduction apply.
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