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 $432,000 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 $41,000 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 $85,000, but it is expected to incur additional annual operation of $22,000.
What are the additional income taxes paid because of the project in year 1 if the tax rate is 34%?"

Answer 1

	With Project	Without Project
Taxable income in Year 1	484667 (WN1)	432000
Tax rate	34%	34%
Tax amount	164786.78	146880
Additional tax	17906.78 (164786.78-146880)
WN1 - Taxable income in year1 with the project
Purchase of new machine = $41000
Life of asset = 3 years
Salvage value after 3 years = $10000
Depreciation for 1st year as per MACRS = (41000-10000)/3 = $10333
Annual taxable income without the project = $432000
Additional revenue due to new project = $85000
Additional operational cost due to new project = $22000
Additional depreciation = $10333
Annual taxable income with the project = $432000+85000-22000-10333 = $484667