To fulfill the rising demand for prototype manufacturing your company is considering purchasing a new set of machine tools that will be dedicated to these small scale prototype production runs. The following information considers the next three years of operations:
*Regular operations
-If no investment is made the company anticipates an annual taxable income of $350,000 each year from its regular business operations
*Investment in new tools
-Purchase cost $50,000
-The new tools would be depreciated according to the 3 year MACRS schedule
-At the end of the three year period the tools would be sold for $10,000
-Anticipated additional annual revenue from investment: $80,000
-Anticipated annual operating and maintenance expenses from investment: $20,000
If an investment is made in the new tools:
(a) What are the additional taxable incomes during each of the next three years of operations?
(b) What are the additional income taxes during each of the next three years of operations?
(c) Compute the gains taxes when the tools are sold at the end of the 3rd year? Assume gains are taxed at the incremental tax rate for the investment.