(10 pt) (PTW problem 7-11). The initial installed cost for a new piece of equipm
ID: 2772834 • Letter: #
Question
(10 pt) (PTW problem 7-11). The initial installed cost for a new piece of equipment is S10:000. After the equipment has been in use for 4 years, it is sold for S7:000. The company that originally owned the equipment employs a straight-line method for determining depreciation costs. If the company had used the MACRS 5-year method for determining depreciation costs, the asset or book value for the piece of equipment at the end of 4 years would have been SI 728. The total income tax rate for the company is 35% of all gross earnings. Capital gains taxes amount to 20% of the gain. How much net savings would the company have achieved by using the MACRS method instead of straight-Une depreciation method?Explanation / Answer
Total tax savings in case of straight line method of depreciation = ($10,000 / 5) * 4 * 35%
= $2,800
Tax paid on capital gains in case of straight line method of depreciation = ($7,000 - $2,000) * 20%
= $1,000
Therefore, Overall tax savings in case of straight line method of depreciation = $2,800 - $1,000
= $1,800
Total tax savings in case of MACRS 5-year method of depreciation = ($10,000 - $1,728) * 35%
= $2,895.20
Tax paid on capital gains in case of MACRS 5-year method of depreciation = ($7,000 - $1,728) * 20%
= $1,054.40
Therefore, Overall tax savings in case of MACRS 5-year method of depreciation = $2,895.20 - $1,054.40
= $1,840.80
Net savings by using MACRS instead of straight line = $1,840.80 - $1,800.00
= $40.80
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