\"The Simon Machine Tools Company is considering purchasing a new set of machine
ID: 2529028 • Letter: #
Question
"The Simon Machine Tools Company is considering purchasing a new set of machine tools to process special orders. The following financial information is available.
- Without the project, the company expects to have a taxable income of $487,000 each year from its regular business over the next three years.
- With the three-year project, the purchase of a new set of machine tools at a cost of $54,000 is required. The equipment falls into the MACRS three-year class. The tools will be sold for $10,000 at the end of project life. The project will be bringing in additional annual revenue of $80,000, but it is expected to incur additional annual operation of $16,000.
What are the additional income taxes paid because of the project in year 2 if the tax rate is 34%?"
Explanation / Answer
Normal Income Earned By the Company : $ 487,000
Income Tax Payable : $ 165,580
Taxable income for Second Year
$ 487,000
$ 80,000
$ 567,000
$ 16,000
$ 24,000
$ 527,000
Tax On Above ($ 527,000*34%)
$ 179,180
Working Notes
Year 1 - $ 54,000*33.33% = $ 18,000
Year 2 - $ 54,000*44.45% = $ 24,000
Year 3 - $ 54,000*14.81% = $ 8,000
- Normal Income
$ 487,000
- Additional Income
$ 80,000
- Total Income (a+b)
$ 567,000
- Additional Operational Expense
$ 16,000
- Depreciation Expense (Working Note 1)
$ 24,000
- Net Taxable Income (c-d-e)
$ 527,000
Tax On Above ($ 527,000*34%)
$ 179,180
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