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 $423,000 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 $18,000 at the end of project life. The project will be bringing in additional annual revenue of $83,000, but it is expected to incur additional annual operation of $16,000.
What are the gains tax it pays at the end of year 3 if the tax rate is 34%?"

Answer 1

Working notes:

(i) MACRS depreciation schedule for first 3 years is as follows. This method ignores salvage value.

Year	Depreciation Base ($)	Depreciation Rate (%)	Annual Depreciation ($)
	(A)	(B)	(A) x (B)
1	54,000	33.33	17,998
2	54,000	44.45	24,003
3	54,000	14.81	7,997
		TOTAL DEPRECIATION ($) =	49,999

(ii) Asset's book value at year end ($) = Initial cost - Total depreciation = 54,000 - 49,999 = 4,001

(iii) Gain from sale of asset ($) = Sale proceed - Book value at year end = 18,000 - 4,001 = 13,999

Therefore,

Gains tax ($) = Gain from sale of asset x Tax rate = 13,999 x 34% = 4,759.66