Please show work so I can learn. Thank you. Your company is contemplating the pu
ID: 2719914 • Letter: P
Question
Please show work so I can learn. Thank you.
Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000. Additional transportation and installation costs are $5,000 and $10,000 respectively. Its MV at the end of five years is estimated as $40,000. The IRS has assured you that this machine will fall under a 3-year MACRS class life category. The justifications for this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. The taxable income for year three is:
Explanation / Answer
Cost of the machine = 180000+ 10000+ 5000 = $195000
Depreciation in 1st year = Cost x 1/ Useful Life x A x Depreciation Convention
Depreciation in Subsequent years = (Cost - Depreciation in Previous years) x 1/ Recovery Period x A
A = 200% for the 3 year Class
Taxable Income for the year 3:
Year Depreciation Formula 1 78000 195000x1/5x200%x1 2 58500 (195000-78000)x1/4x200%x1 3 39000 (195000-78000-58500)x1/3x200%x1