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Diamonid is a start-up diamond-coating company that is planning to manufacture a microwave plasma reactor that synthesizes diamonds. Diamonid anticipates that the industry demand for diamonds will skyrocket over the next decade, for use in industrial drills, high-performance microchips, and artificial human joints, among other things. Diamonid has decided to raise $50 million through issuing common stocks for investment in plant ($10 millions) and equipment ($40 million) improvements. Each reactor can be sold at price of $100,000 per unit. Diamonid can expect to sell 300 units per year during the next 8 years. The unit manufacturing cost is estimated at $30,000, excluding depreciation. The operating and maintenance cost for the plant is estimated at $12 million per year. Diamonid expects to phase out the operation at the end of eight years, revamp the plant and equipment, and adopt a new diamond -manufacturing technology. At that time, Diamonid estimates that the salvage values for the plant and equipment will be about 60% and 10% of the original investments, respectively. The plant and equipment will be depreciated according to 39-year real property (placed in service in January) and seven-years MACRS, respectively. Diamonid pays 5% of state and local income taxes on its taxable income.

a) If the 2010 corporate tax system continues over the project life, determine the combined state and federal income tax rate each year.

b) Determine the gains of losses at the time the plant is revamped.

c) Determine the net income each year over the plant life.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M947220

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