Lee Corporation is considering a new project requiring a $300,000 investment in an asset having no sal- vage value. The project would produce $125,000 of pretax income before depreciation at the end of each
of the next six years. The company's income tax rate is 35%. In compiling its tax return and computing
its income tax payments, the company can choose between two alternative depreciation schedules as
shown in the table.
Straight-Line
Depreciation
MACRS
Depreciation
Year 1
Year 2...
Year 3..
Year 4
Year 5
Year 6
Totals
$ 30,000
60,000
60,000
60,000
60.000
30.000
$300,000
$ 60,000
96,000
57,600
34,560
34,560
17.280
$300,000
50,000
Required
1. Prepare a five-col table that reports amounts (assuming use of straight-line depreciation) for each
of the following items for each of the six years: (a) pretax income before depreciation, (b) straight-
line depreciation expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow
equals the amount of income before depreciation minus the income taxes. (Round answers to the
nearest dollar.)
2. Prepare a five-column table that reports amounts (assuming use of MACRS depreciation for each
of the following items for each of the six years: (a) income before depreciation, (b) MACRS depreciation