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Dig Co has a big contract to dig holes for a government installation. It is a...

Dig Co has a big contract to dig holes for a government installation. It is a four year contract. They will earn $250,000 per year. They have two choices for acquiring the required backhoe and bulldozer. They can lease both of them for $85570 per year or they can buy both for $550000. At the end of 4 years they can sell them for $200,000. Dig Co has a state corporate tax of $8.7%, and they will pay the 21% federal tax. Both machines are 3-year property and will use MACRS depreciation with half year convention. Dig Co. has an after tax MARR of 10%. Use ATPW analysis to choose the best alternative.

a) What is their total tax rate? %

b) ATPW if they lease the equipment? $

c) ATPW if they buy the equipment?

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Answer #1

Effective State bracket = (100% - Federal tax bracket) x State tax bracket

= (100%-21%)*8.7% = 6.87%

Total Tax rate = federal tax + Effective State bracket

=6.87%+21% = 27.87%

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