Problem 16-48 MACRS Depreciation; Present Value of Tax Shield (Section 2) (LO 16-4, 16-5)

Mind Challenge, Inc., publishes innovative science textbooks for public schools. The companys management recently acquired the following two new pieces of equipment. Computer-controlled printing press: cost, $324,000; considered to be industrial equipment; expected useful life, 12 years. Duplicating equipment to be used in the administrative offices: considered to be office equipment; cost, $65,700; expected useful life, six years. The company uses straight-line depreciation for book purposes and the MACRS accelerated depreciation schedule for tax purposes. The firms tax rate is 30 percent; its after-tax hurdle rate is 10 percent. Neither machine has any salvage value.

Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

For each of the publishing companys new pieces of equipment:

1. Prepare a schedule of the annual depreciation expenses for book purposes.

2. Determine the appropriate MACRS property class.

3. Prepare a schedule of the annual depreciation expenses for tax purposes.

4. Compute the present value of the depreciation tax shield.