MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc.,
ID: 2652021 • Letter: M
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? (Use Table 4.2 on page 120.)
b. If the firm reduces its reported income by the amount of the depreciation expense
calculated in part a, what tax savings will result?
Explanation / Answer
Let me post the MACRS schedule
Percentage by recovery year(a)
Recovery year 3 years 5 years 7 years 10 years
1 33% 20% 14% 10%
2 45 32 25 18
3 15 19 18 14
4 7 12 12 12
5 12 9 9
6 5 9 8
7 9 7
8 4 6
9 6
10 6
11 4
Totals 100% 100% 100% 100 %
a. We are looking for depriciation expense over 5 year cost recovery period
So we will use 5 yrs MCRS
Thus first year depriciation expense = 0.2*20000 = $4000
b. Since depriciation is $4000, tax savings will bedetermined by tax rate. Since tax rate is not given, we assume it to be 30%
Thus tax savings= 4000 * 0.3 = $1200
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