Joan is interested in buying a special diagnostic machine for use in her medical practice. The machine will cost her $16,000 and will have a $2,000 salvage value at the end of its 8-year life. Joan would like to know the actual cost of the machine after considering the effect of the present value of tax savings from depreciation. If she buys the machine, she will place it in service on April 1, 2020. Based on the following assumptions, what is Joan’s after-tax cost? Assume that Joan is in the 32 percent marginal tax rate bracket and that the time value of money is worth 10 percent. Write a letter to Joan explaining the following options:

a. Joan will depreciate the machine over 5 years using MACRS.

b. Joan will depreciate the machine using the straight-line method over the 7-year ADS life.

c. Joan will deduct the $16,000 investment as an expense in 2020.