please show all calculations and use this table to calculate taxes. I included tbe tax table too.
P4-3 MACRS depreciation expense and accounting c Inc., a maker of expense and accounting cash flow Pavlovich Instruments precision telescopes, expects to report pretax income of $430,000 s 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 wil 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? CHAPTER 2 The Financial Market Environment 47 Corporate Tax Rate Schedule TABLE 2.1 Tax calculation Range of taxable income Base tax +Marginal rate x amount over base bracket) 0 to S 50,000 0 + (15% amount over $ 50,000 to 0) 75,000 7,500 + 5 x amount over 75,000 to 50,000 100,000 13,750+134amount over 100,000 t 335,000 75,000 22,250 +139amount over 100,000 335,000 to 10,000,000 10,000,000 to 15,000,000 3,400,000 (3smount over10,000,000) 15,000,000 to 18,333,333 ,150,000 38msount over 15,000,000 113,900 +134amount over 335,000 Over 18,333,333 6,416,667 + 135 amount ove 18,333,333) Example 2.2 Webster Manufacturing, Inc, a small manufacturer of kitchen knives, has before- tax earnings of $250,000. The tax on these earnings can be found by using the tax rate schedule in Table 2.1: Total taxes due = S22.250 + [0.39 x (S250,000-$100,000] $22,250+(0.39 x $150,000) $22,250 + $58,500 S80.750 From a financial point of view, it is important to understand the difference between average and marginal tax rates, the treatment of interest and dividend income, and the effects of tax deductibility. Marginal versus Average Tax Rates The marginal tax rate represents the rate at which the next dollar of income is morginal tax rate Ihe rate at which additional taxed. In the current corporate tax structure, the marginal tax rate is 15 percent income is toxed f the firm earns less than $50,000. If a firm earns more than $50,000 but less than $75,000, the marginal tax rate is 25 percent. As a firm's income rises, the marginal tax rate that it faces changes as shown in Table 2.1. In the example above, if Webster Manufacturing's earnings increase to $250,001, the last $1 in income would be taxed at the marginal rate of 39 percent. The average tax rate paid on the firm's ordinary income can be calculated by dividing its taxes by its taxable income. For most firms, the average tax rate does not equal the marginal tax rate because tax rates change with income levels. In the example above, Webster Manufacturing's marginal tax rate is 39 percent, but its average tax rate is 32.3 percent (80,750 $250,000). For very large corpo- rations with earnings in the hundreds of millions or even billions of dollars, the average tax rate is very close to the 35 percent marginal rate in the top bracket because most of the firm's income is taxed at that rate. In most of the business decisions that managers make, it's the marginal tax ge lax rate axes divided by its bxoble income. a flat 40 percent tax rate. That means that both the average tax rate and the ma ginal tax rate equal 40 percent really matters. To keep matters simple, the examples in this text will use
