Question

Suppose an owner pays $500 million to purchase a hockey team that earns operating profits of $50 million per year. The new owner claims that $200 million of this prices is for the players, which he can depreciate using straight-line depreciation in five years. If the team pays corporate profit taxes of 40 percent, how much does the depreciation of the players save the owner

Answer 1

Answer:

The company will save 16 million dollar per year (till 5 years).

Explanation:

The saving can be easily calculated by subtracting tax paid after charging depreciation from tax paid if no depreciation is charge.

Tax Paid if no depreciation is charge

 = $ 50 * 40% = $ 20 Million -A

Tax Paid if depreciation is charge

 = ($ 50- $ 40") * 40% = $ 4 Million -B

" 200/5 =40

Tax saving = A-B = $ 16 Million per year