PRINCIPLES OF MANAGERIAL ACCOUNTING Chapter 15

After-tax issues After-tax Cost of a Cash Expense After-tax cost = (1- Tax rate) x Cash expense After-tax benefit of a cash receipt After-tax benefit = (1- Tax rate) x Cash receipt

Depreciation Tax Shield Depreciation is fully deductible in computing taxable income Tax savings from the depreciation tax shield = Tax rate x Depreciation deduction Investments in equipment must be paid up front, but benefits of the tax deduction is spread over the useful life of the equipment

MACRS (Modified Accelerated Cost Recovery System) Eight property classes determine the years of depreciation No salvage value Generally, half year convention is used Generally 200% declining balance is used, until S/L would be higher then it automatically switches S/L throughout the life is optional

Assignment Problems 5 and 6 (use S/L Depr)