120 PART 2 Financial Toos Yoor Using MACRS TABLE 4.2 for First Four Propnly Closses Percentage by recovery year 7 years 10 ycars 3 years 33% 45 15 5 years 20% 32 19 12 12 Recovery year 14% 25 18 12 10% 18 14 12 9 10 Totals 100% 100% 100% 100% have beengounded to the nearest whole percent to simplify calculations while retain- These percentages ing realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining halance depreciation using the half-year convention. Baker Corporation acquired, for an installed cost of $40,000, a machine having a recovery period of 5 years. Using the applicable percentages from Table 4.2, Baker calculates the depreciation in each year as follows: ample 4.2 Depreciation Percentages (from Table 4.2) Year Cost 1(1)x( s $,00o 12.sop 7.600 4,800 4.800 21000 $40,000 $40,000 20% 40,000$2 40.00019 40,000) 40,000 12 100% 19% page 120 of 804 P4-3 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 F52 42 43 45 46 47 Problem P4-3: 48 49 Part a- 50 51 52 53 54 Cost of grinder Depreciation % Depreciation 56 Part b. 57 58 Pre-tax income Less: Depreciation Net taxable income 60 61 62