Vendome Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: $\begin{array}{lr}
\text { Acquisition cost } & \$ 500,000 \
\text { Annual cash flow } & \$ 180,000 \
\text { Annual operating costs } & \$ 30,000 \
\text { Expected salvage value } & \$ 0\
\text { Cost of capital } & 12 \% \
\text { Tax rate } & 40 \%
\end{array}$ Vendome plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) The tax savings from depreciation in Year 3 would be

Question

Quizplus · Accepted Answer

In Year 3, the MACRS depreciation rate for 5-year property is 19.20%. The depreciation expense is $500,000 * 19.20% = $96,000. The tax savings is $96,000 * 40% = $38,400.

Vendome Company Is Considering the Purchase of the Following Computer