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 $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

a)

Depreciation expense claim:

= $80,000×20%

= $16,000

b)

Tax saving:

= $16,000×35% (In the absence of information, Tax rate assumed)

= $5,600

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