Plastic Recycling Company is just starting operations with new equipment costing $30,000 and a useful life of

Question:

Plastic Recycling Company is just starting operations with new equipment costing $30,000 and a useful life of five years. At the end of five years the equipment probably can be sold for $5,000. The company is concerned with its cash flow and wants a comparison of straight-line and MACRS1 depreciation to help management decide which depreciation method to use for financial statements and for its income tax return. Assume a 40 percent tax rate. Longer-Run Decisions: Capital Budgeting 901

1Modified Accelerated Cost Recovery System (effective for assets placed in use after December 31, 1986.)

Required:

a. Calculate the difference in taxable income and cash inflow under each method. Assume MACRS allowances are 20, 32, 18, 15, and 15 percent for years 1–5 respectively.

b. Which deprecation method is preferable for tax purposes? Why?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...