Chapter 13 Income Taxes
Chapter 13 Income Taxes
Chapter 13 Income Taxes
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
194 <strong>Chapter</strong> <strong>13</strong> <strong>Income</strong> <strong>Taxes</strong><br />
<strong>13</strong>-21<br />
The Salsaz-Hot manufacturing company must replace a machine used to crush tomatoes for its<br />
salsa. The industrial engineer favors a machine called the Crusher. Information concerning the<br />
machine is presented below.<br />
First Cost $95,000<br />
Annual Operating Costs 6,000<br />
Annual Insurance Cost* 1,750<br />
Annual Productivity Savings 19,000<br />
*Payable at the beginning of each year<br />
Depreciable Salvage Value $10,000<br />
Actual Salvage Value 14,000<br />
Depreciable Life<br />
6 yrs<br />
Actual Useful Life<br />
10 yrs<br />
Depreciation Method<br />
SL<br />
Property taxes equal to 5% of the first cost are payable at the end of each year.<br />
Relevant financial information for Salsaz-Hot:<br />
Marginal Tax Rate 34%<br />
MARR 10%<br />
Determine net present worth.<br />
Solution<br />
Cash expenses are multiplied by (1 - tax rate)<br />
<strong>Income</strong>s are multiplied by (1 - tax rate)<br />
Depreciation is multiplied by tax rate<br />
Capital recovery is not taxable therefore multiplied by 1<br />
Recaptured depreciation is multiplied by (1 - tax rate)<br />
Year<br />
0 First Cost -95,000<br />
1-10 Net Savings <strong>13</strong>,000(P/A, 10%, 10)(.66) 52,724<br />
1-10 Property <strong>Taxes</strong> .05(95,000)(P/A, 10%, 10)(.66) -19,265<br />
0-9 Insurance [1,750 + 1,750(P/A, 10%, 9)](.66) -7,807<br />
1-6 Depr. 14,167(P/A, 10%, 6)(.34) 20,977<br />
10 Capital Recovery 10,000(P/F, 10%, 10) 3,855<br />
10 Recaptured Depr. 4,000(P/F, 10%, 10)(.66) 1,018<br />
NPW -$43,498
Change language