Question

MACRS depreciation expense and accounting cash flow Pavlovich Instruments,

Inc., a maker of precision telescopes, expects to report pretax income of $430,000
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
$80,000 and a cost recovery period of 5 years. They will be depreciated using the
MACRS schedule.
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?

Answer 1

a. The depreciation expense for this year would be $16,000. b. the tax savings resulting from this depreciation expense would be $4,800.

Step-by-step explanation:

a. Under the MACRS schedule, the grinders will be depreciated over a 5-year period. The depreciation expense for each year is determined based on the assigned recovery period and the percentage associated with that year. For example, if we assume the grinders are in the 5-year recovery period, the first year's depreciation expense will be calculated using a percentage of 20%. To find the depreciation expense for this year, we multiply the installed cost of $80,000 by 20%, which gives us $16,000 depreciation expense.

b. To calculate the tax savings resulting from the depreciation expense, we multiply the depreciation expense by the company's tax rate. Let's assume a tax rate of 30%. Therefore, the tax savings would be $16,000 x 0.30 = $4,800.