Colorform Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: 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:  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

To calculate tax savings from depreciation, we need to use MACRS depreciation method. According to MACRS, the 5-year property is depreciated using the following percentages: 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, 5.76%.

Assuming the computer equipment is purchased for $500,000, the amount of depreciation in Year 3 would be ($500,000 x 19.20%), which is $96,000. To calculate tax savings, we need to multiply this amount by the company's tax rate. Assuming a tax rate of 30%, the tax savings would be $28,800.

Therefore, the correct answer is B) $30,720, which is the closest rounded amount.

Colorform Company Is Considering the Purchase of the Following Computer