Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of...

Question:

Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pre-tax income of $430,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. Depreciate using the MACRS schedule.

MACRS:

MACRS or Modified Accelerated Cost Recovery System is the depreciation method used to find out depreciation amounts for tax purposes. In this method, the asset is depreciated at a higher rate at the beginning of the period and declines with the completion of asset period.

Answer and Explanation:

Depreciation rates under 5 year MACRS schedule is 20%,32%,19.20%,11.52%,11.52%,5.76%

The MACRS schedule of the asset is as follows:

Years Opening Value Depreciation rate Depreciation amount Closing Value
$ $ $ $
1 80,000.00 20.00% 16,000.00 64,000.00
2 64,000.00 32.00% 25,600.00 38,400.00
3 38,400.00 19.20% 15,360.00 23,040.00
4 23,040.00 11.52% 9,216.00 13,824.00
5 13,824.00 11.52% 9,216.00 4,608.00
6 4,608.00 5.76% 4,608.00 -

Learn more about this topic:

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How to Calculate Depreciation Expense: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 14
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