Plastic Recycling Company is just starting operations with new equipment costing $30,000 and 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 MACRS depreciation to help management decide which depreciation method to use financial statements and for its income tax return. Assume 40 percent tax rate.

Required:

1. 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.
2. Which depreciation method is preferable for tax purposes? Why?