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 $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%?"

Answer 1

Additional Income Tax to pain in year 2 by Simon Machine Tools Co. Ltd.

PARTICULARS	With the project	Without the project	Additional Amount
	Amount In $	Amount In $	Amount In $
Taxable Income	368,000	368,000	-
Additional annual revenue	-	85000	85000
Less:
Additional annual operation cost	-	17000	17000
Depreciation ( As per working)	-	11333	11333
Total Taxable Income	368,000	424,667	56667
Tax at the rate of 34%	125,120	144,387	19,267

Working Note : Depreciation = Cost of machine - Selling price of machine at end of project / Life of project

Depreciation = $52,000 - $18,000 / 3

Depreciation = $ 11,333.33