please answer the question correct. Noisy Firm Corp., a maker of stereos, expect
ID: 1172517 • Letter: P
Question
please answer the question correct.
Noisy Firm Corp., a maker of stereos, expects to report pretax income of $70,000 this year. The company’s CFO is considering purchase of a new robot. The robot will have an equipment cost of $20,000, and will cost $5000 to install. It will have a cost recovery of 5 years and will be depreciated for tax purposes using the MACRS schedule. a.) If the firm purchases the robot before year end, what depreciation expense will it claim this year (use the MARCS table)? b. If the firm reduces its reported income by the amount of the depreciation expense calculated in a above, what tax savings will result?
Rounded Depreciation Percentages by Recovery Year Using MACRS for Equipment % by Recovery Year
Recovery Year: 5 Years:
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1 20%
2 32
3 19
4 12
5 12
6 5
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Total 100%
Explanation / Answer
a)If the firm purchases the robot before year end, the depreciation claimed as per MACRS schedule will be 20% * (20,000+5000)
i.e. $5000
b) Depreciation is a non-cash item. It doesn’t result in outflow of cash but leads to a saving in tax
Tax Savings = Depreciation*Tax Rate
= 5000*Tax Rate
Note: Since rate of tax is not given in question, final answer cannot be calculated.
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