Question

Please complete Part B

MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $425,000 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 $78,500 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule A. Corporate tax rates are given A 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 $ 15700. (Round to the nearest dollar.) b. The tax savings will be $ . (Round to the nearest dollar.) i More Info (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Corporate Tax Rate Schedule + + + + Range of taxable income $0 to $50,000 50,000 to 75,000 75,000 to 100,000 100,000 to 335,000 335,000 to 10,000,000 10,000,000 to 15,000,000 15,000,000 to 18,333,333 Over 18,333,333 Base tax $0 7.500 13,750 22,250 113,900 3,400,000 5,150,000 6,416,667 Tax calculation (Marginal rate x Amount over base bracket) (15% X amount over $0) (25% x amount over 50,000) (34% x amount over 75,000) x amount over 100,000) x amount over 335.000) (35% x amount over 10,000,000) (38% x amount over 15,000,000) (35% x amount over 18,333,333) + + + +

Answer 1

The tax saving will be $ 5,338

Pre tax Income for this year = $425,000 Grinders Cost $78,500 Depreciation = 5 - year MACRS Solution b Taxable Income (X) Tax Computation Formula Tax Rate % Morethan But not morethan Tax Owed $50,000 $75,000 $100,000 +15% of amount beyond $0 +25% of amount beyond $50,000 +34% of amount beyond $75,000 +39% of amount beyond $1000,000 +34% of amount beyond $335,000 +35% of amount beyond $10,000,000 +38% of amount beyond $15,000,000 +35% of amount beyond $18,333,333 $0 $0 15 $50,000 $75,000 $100,000 $335,000 $10,000,000 $15,000,000 $18,333,333 $7,500 $13,750 $22,250 $113,900 $3,400,000 $5,150,000 $6,416,666 25 34 $335,000 $10,000,000 $15,000,000 $18,333,333 and Up 39 34 35 38 35 a) Pre tax Income for this year (Year 1) $425,000 $15,700 $409,300 b) Depreciation Expense (Year 1) c) Taxable Income (Year 1) (a-b) d) Marginal Tax Rate for this year as per the Income 34% $5,338 e) Tax Savings = Depreciation* Tax Rate = b*d