A manufacturing firm is considering purchasing a new machine for $224,000. The f

Question

A manufacturing firm is considering purchasing a new machine for $224,000. The firm plans on borrowing $112,000 to be paid off in equal payments in 3 years. The interest rate on the loan is 7.2%. The machine is classified as 7-years MACRS. Using the machine will save $72,000 in labor costs each year. The annual O&M costs for the machine are $8,000. The firm plans on using the machine for 5 years after which it will be salvaged for $100,800. Calculate the taxable income (i.e., income before taxes) for the income statement for year 4 if the firm purchases the machine.

Explanation / Answer

Year 4:

Depreciation for Year 4 = 224000*12.49% = 27977.60

Annual O&M costs for the machine = 8000

Savings in labor cost = 72000

Taxable income for year 4 = 72000 - 27977.60 - 8000 = 36022.40

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