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

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 $339,000 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 $53,000 is required. The equipment falls into the MACRS three-year class. The tools will be sold for $15,000 at the end of project life. The project will be bringing in additional annual revenue of $90,000, but it is expected to incur additional annual operation of $23,000.
What are the additional income taxes paid because of the project in year 2 if the tax rate is 34%?

Explanation / Answer

Cost of assets   = $53000 Salvage Value = $15000 Project Life = 2 Yrs Deprication Per Annum = (53000 - 15000)/2    = 19000 Calculation Of Income Tax for This Year for project Revenue                                       =                                          $90000 Less Expenditure                        =                                          $23000 Less Deprication                         =                                         $19000                                          Profit                                             =                                         $48000 Income Tax                                   =                                         $16320 Additional Income Tax Due to Project is      = $16320 Per Annum

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