The local printing company purchases a new copy machine for $150,000 that reduces the cost of making a color copy by ten cents a copy. The copy machine can be depreciated straight line for seven years and the company is in the 28 percent income tax bracket. The owner believes the machine can be sold for $10,000 at the end of seven years. What is this company's total tax savings due to depreciation?

Question

Quizplus · Accepted Answer

The total depreciation is the cost of the machine minus the salvage value, which is $150,000 - $10,000 = $140,000. Straight-line depreciation means this amount is spread evenly over 7 years, so annual depreciation is $140,000 / 7 = $20,000. The tax savings each year is the depreciation times the tax rate, so $20,000 * 28% = $5,600. Over 7 years, the total tax savings is $5,600 * 7 = $39,200.

The Local Printing Company Purchases a New Copy Machine for $150,000