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%?"

Answer 1

1. Without the project

Normal Income Earned By the Company :             $ 487,000

Income Tax Payable                                        :               $ 165,580

1. With the Three Year Project

Taxable income for Second Year

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

1. Additional Income tax Payable in second Year Due to Installation of New Machinery is

1. Tax as per (ii) above                =             $ 179,180
2. Tax as per (i) above                 =             $ 165,580
3. Additional Income tax(a-b) =             $   13,600

Working Notes

1. Depreciation under MACRS (using % table provided by IRS)

Year 1 - $ 54,000*33.33%              =             $ 18,000

Year 2 - $ 54,000*44.45%              =             $ 24,000

Year 3 - $ 54,000*14.81%              =             $   8,000