You consider purchasing a new piece of equipment (7yr MACRS property) for your manufacturing process for $120,000. The equipment has a 6-year useful life and no salvage value. The equipment is expected to generate an additional $40,000 of net income before taxes and depreciation each year by using this upgraded system. The combined federal and state income tax rate= 35%. Annual inflation = 4%. a. Fill in the following table assuming MACRS depreciation rates Year 0 Pretax MACRS Taxable income Depreciation income Tax owed After tax income Inflation adjustment factor Real after tax income

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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You consider purchasing a new piece of equipment (7yr MACRS property) for your manufacturing process for $120,000. The
equipment has a 6-year useful life and no salvage value. The equipment is expected to generate an additional $40,000 of net
income before taxes and depreciation each year by using this upgraded system. The combined federal and state income tax
rate= 35%. Annual inflation = 4%.
a. Fill in the following table assuming MACRS depreciation rates
Year
46°F
Rain showers
0
1
F1 2
O
2
3
4
5
Pretax
income
6
MACRS Taxable
Depreciation income
F2 -
F3 +
F4
Ⓡ
b. If your MARR = 12%, should you purchase this system based on your real after-tax income? Why or why not?
F5
8
C
B
Tax owed
F6
Q Search
G
After tax
income
F7 Ca
7
F8
O
Inflation
adjustment
factor
O
F9
ala
LG
F10
Real after
tax income
0
A
I
THE
F11 -
0
1
asod
F12 +
Prt Sc
ScrLk
Post-it
sod
Ins
Post-it
Del
Backspace
Post-it
PgUp
Home
asod>
Post-it
Mumi
1-10
PgOn
End
Pause
Break
11-15
11-15
C
Transcribed Image Text:Esc You consider purchasing a new piece of equipment (7yr MACRS property) for your manufacturing process for $120,000. The equipment has a 6-year useful life and no salvage value. The equipment is expected to generate an additional $40,000 of net income before taxes and depreciation each year by using this upgraded system. The combined federal and state income tax rate= 35%. Annual inflation = 4%. a. Fill in the following table assuming MACRS depreciation rates Year 46°F Rain showers 0 1 F1 2 O 2 3 4 5 Pretax income 6 MACRS Taxable Depreciation income F2 - F3 + F4 Ⓡ b. If your MARR = 12%, should you purchase this system based on your real after-tax income? Why or why not? F5 8 C B Tax owed F6 Q Search G After tax income F7 Ca 7 F8 O Inflation adjustment factor O F9 ala LG F10 Real after tax income 0 A I THE F11 - 0 1 asod F12 + Prt Sc ScrLk Post-it sod Ins Post-it Del Backspace Post-it PgUp Home asod> Post-it Mumi 1-10 PgOn End Pause Break 11-15 11-15 C
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Section 179 Deduction and Modified Accelerated Cost Recovery System (MACRS) Depreciation
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