1.The Simon Machine Tools Company is considering purchasing a new set of machine

Question

1.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 $368,000 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 $52,000 is required. The equipment falls into the MACRS three-year class. The tools will be sold for $18,000 at the end of project life. The project will be bringing in additional annual revenue of $85,000, but it is expected to incur additional annual operation of $17,000.
What are the additional income taxes paid because of the project in year 2 if the tax rate is 34%?

2. 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 $44,000 is required. The equipment falls into the MACRS three-year class. The tools will be sold for $17,000 at the end of project life. The project will be bringing in additional annual revenue of $83,000, but it is expected to incur additional annual operation of $30,000.
What are the gains tax it pays at the end of year 3 if the tax rate is 34%?

Explanation / Answer

1 Additional tax payable Particulars Amount $ Additional revenue from project                                                        85,000.00 Less:Additional operation cost                                                       -17,000.00 Less:Deprceiation allowed (52,000*44.45%)                                                       -23,114.00 Additonal taxable income                                                        44,886.00 Additional tax payable @ 34%-44,886*34%                                                        15,261.24 2-Gains tax Particulars Amount $ Cost of the machine tools                                                        44,000.00 Less: MACR deprceiation for three years (33.33+44.45+14.81=92.59%)                                                       -40,739.60 Book value on the date of sale                                                           3,260.40 Sale value                                                        17,000.00 Gains on sale (17000-3260.40)                                                        13,739.60 Tax @ 34%=13739.6*34%                                                           4,671.46 Note MACR Depreciation rates ( For 3 years class) Year-1             33.33% Year-2            44.45% Year-3          14.81%

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