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