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 he can sell the machine 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 over seven years is $150,000. The annual depreciation is $150,000 / 7 = $21,428.57. The tax savings each year is $21,428.57 * 28% = $6,000. The total tax savings over seven years is $6,000 * 7 = $42,000. However, the salvage value of $10,000 is not depreciated, so the correct total tax savings is $39,200.

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