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

Question

Business

Russell Frank

23 December, 09:18

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

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Answers (1)

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Mackenzie Hunt · Answer 1

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