Quiet Headset Inc., a maker of noise cancelling headphones, expects to report pretax income of $60,000 this year. The companys CFO is considering purchase of a new robot. The robot will have an initial equipment cost of $10,000, and will cost $2,500 to install. It will have a cost recovery of 5 years and will be depreciated for tax purposes using the MACRS schedule.

a. If the firm purchases the robot before year end, what depreciation expense will it claim this year (use the MARCS table)?

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in (a) above, what tax savings (use the tax table in question 3) will result?

Rounded Depreciation Percentages by Recovery Year Using MACRS for Equipment

% by Recovery Year

Recovery year 5 years

1 20%

2 32

3 19

4 12

5 12

6 5

Total 100%