Colorform Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: $\begin{array}{lrr}
\text { Acquisition cost } & \$ 400,000 \
\text { Annual cash flow } & \$ 140,000 \
\text { Annual operating costs } & \$ 20,000 \
\text { Expected salvage value } & \$ 0 \
\text { Cost of capital } & 10 \% \
\text { Tax rate } & 40 \%
\end{array}$ Colorform Company plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.)
Tax savings from depreciation in Year 3 would be

Question

Colorform Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: $\begin{array}{lrr}
\text { Acquisition cost } & \$ 400,000 \
\text { Annual cash flow } & \$ 140,000 \
\text { Annual operating costs } & \$ 20,000 \
\text { Expected salvage value } & \$  0 \
\text { Cost of capital } & 10 \% \
\text { Tax rate } & 40 \%
\end{array}$ Colorform Company plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.)
Tax savings from depreciation in Year 3 would be

Quizplus · Accepted Answer

Under MACRS, 5-year property has a Year 3 depreciation rate of 19.2%. The depreciation expense is $400,000 * 19.2% = $76,800. Tax savings are calculated as depreciation expense * tax rate = $76,800 * 40% = $30,720.

Colorform Company Is Considering the Purchase of the Following Computer