1. 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 $498,000 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 $50,000 is required. The equipment falls into the MACRS three-year class. The tools will be sold for $15,000 at the end of project life. The project will be bringing in additional annual revenue of $84,000, but it is expected to incur additional annual operation of $19,000.
What are the additional income taxes paid because of the project in year 2 if the tax rate is 34%?
2. A highway contractor is considering buying a new trench excavator that costs $386,000 and can dig a 3-foot-wide trench at the rate of 21 feet per hour. The annual number of feet to dig each year is 7,400. The machine's production rate will remain constant for the first 4 years of the operation and then decrease by 3 feet per hour for each additional year. The maintenance and operating costs will be $72 per hour. The contractor will depreciate the equipment with a five-year MACRS. At the end of 5 years, the excavator can be sold for $65,000. The contractor will earn an additional annual revenue of $147,000 with this new machine. Assuming the contractor's tax rate is 31% per year, determine the net present worth of the cash flow from this machine. The company's MARR is 11%.