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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. They will be depreciated using the MACRS schedule.
a. if the firm purchases the grinders before year end, what depreciation expense will it be able to claim this year?
b. if the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?
c. Assuming that Pavlovich does purchase the grinders this year and that they are its only depreciable asset, use the accounting definition given in Equation to find the firm's cash flow from operations for the year.
Equation
Cash flow from operations = Net profits after taxes + Depreciation and other noncashcharges
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