MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc.,

Question

MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $440,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of s80.900 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule Corporate tax rates are given 6 a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year? b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result? a. The depreciation expense they will be able to claim this year is 16180. (Round to the nearest dollar.) b. The tax savings will be $(Round to the nearest dollar)

Explanation / Answer

(a) ..... Cost of the asset = 80900. And rate applicable as per MACRS - 5 years property is 20%

So Depreciation = 80900 * 20% = 16280

(b) ..... Tax saving = 16200 * 0.34 = 5501

Explanation : The income of the company before this depreciation is 440,000 and after claiming 16280 as depreciation, taxable income of the corporation = 440,000 - 16280 = 423720

A reference to the table of tax rates applicable to a corporation, this income falls in the range of

Above 335,000 but below 10,000,000 ......... here the marginal tax rate = 34%. So tax saved due to depreciation shall be 34% of 16280 = 5501.2 ............ rounded to nearest dollar.

Hopefully, above worked helped you...... all the best.

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