Question

Create a table to determine the annual tax effects (increase or decrease to taxes paid) if they decide to purchase the new machine. A) Assume a tax rate of 30% B) Depreciate assets based on the information in the case (do not use MACRS). C) Identify and label each adjustment to taxable income, don't just present the net increase/ decrease for each year.

The new machine costs $140,000 and the straight line depreciation of 10 percent per annum and after five years they would sell it for $60,000. The seller offered to offered a fixed amount for maintenance starting at $2,000 in the first year and increase it by $1,000 each year.

The labor cost will be saved 10 percent of the existing reduction of 30/hour based on a 35 hour week in a 50 week year and then it will then increase a fixed 250 each year.

The electricity cost will save the company 10 percent of the existing reduction of 5.625 per hour, 24 hours a day, seven days a week in a 50 week year. This electricity saving would then increase by a fixed 75 each year.

The old machine was offered 35,000 cash for the machine that represents its current book value and if the company decided to keep the machine the company can claim 6,000 per year depreciation. After the 5 years the machine would be unserviceable and it would be sold for $5,000 scrap. If the company decided to keep the old machine it would require 28,000 to be spent immediate and 7,000 inn regular maintenance in each of the five years. in year 3 it would require another 4,000 in maintenance cost.

Answer 1

Year	1	2	3	4	5
(All amount in $)
Maintenance	2,000.00	3,000.00	4,000.00	5,000.00	6,000.00
Depreciation	16,000.00	16,000.00	16,000.00	16,000.00	16,000.00
Increase in labour cost after 1st year (increase by 250 each year)	-	250.00	500.00	750.00	1,000.00
Increase in electricity cost after 1st year (increase by 75 each year)	-	75.00	150.00	225.00	300.00
Total Expenses by using new machine	18,000.00	19,325.00	20,650.00	21,975.00	23,300.00
Savings by using new machine
Labour Cost	5,250.00
Electricity cost	4,725.00
Sale of old machine	35,000.00
Total savings by using new machine	44,975.00
Net Impact (- for expenses and + for savings)	26,975.00	(19,325.00)	(20,650.00)	(21,975.00)	(23,300.00)
Impact on tax (30% rate - + for tax payable and - for savings)	8,092.50	(5,797.50)	(6,195.00)	(6,592.50)	(6,990.00)
Labour cost Calculations
Existing
30 per hour	52,500.00
35 Hrs per week
50 Weeks per year
Reduction	5,250.00
Labour cost after savings in first year	47,250.00
Electricity cost calculations
Existing
5.625 per hour	47,250.00
24 Hrs a day
7 days a week
50 weeks per year
Reduction	4,725.00
Electricity cost after savings in first year	42,525.00