8 Chapter Accounting for Depreciation and Income Taxes
Note: For the most up-to-date depreciation and income tax information, consult the
books website at http://www.prenhall.com/park and click on Tax Information 8.1) 8.2) 8.3) Total property value with the warehouse:
Original cost Adjustments to basis add: new warehouse demolition expense subtract: building loss adjusted cost basis land $65,000 building $55,000 $50,000 $8,000 ($55,000) $58,000
(a), (b), (e), (f), (h) (amortization, rather than depreciation) The loss of value is defined as the purchase price of an asset less its market value, also known as economic depreciation. Economic depreciation during 4-year ownership: $5,000 $2,300 = $2, 700 Economic depreciation during the last 3-year ownership: $2,300 0 = $2,300
$65,000
Total value = $65,000 + $58,000 = $123,000 Note that the old house that was demolished has no value. This loss may be deductible for tax purpose, but this should not be added to the cost basis of the new asset. In general, the propertys entire basis is allocated to the land only, if the company intends to demolish the building when they acquire property for business use. Then, the cost basis is increased by the net cost of demolition. (The demolition expense can be treated as a site preparation expense.) Cost basis for depreciation: Cost basis = $8,000 + $50,000 = $58,000 Trade-in allowance:
Old molding machine (Book value) less: trade-in allowance Unrecognized gain Cost of a new molding machine less: unrecognized gain on trade-in allowance Cost basis of the new molding machine $15,000 $20,000 $5,000 $105,000 ($5,000) $100,000
8.4)
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Comments: If the old molding machine is sold on the market (instead of traded in), there will be no unrecognizable gain. In that situation, the cost basis for the new molding machine will be just $105,000. 8.5) Trade-in allowance:
Old grinder (Book value) less: trade-in allowance unrecognized loss cost of a new grinder plus: unrecognized loss on trade-in allowance cost basis of new grinder $12,000 $10,000 ($2,000) $45,000 $2,000 $47,000
Comments: If the old grinder is sold on the market (instead of traded in), there will be no unrecognized loss. In that situation, the cost basis for the new grinder will be just $45,000.
8.6)
Cost basis for flexible manufacturing cells:
flexible manufacturing cells (@$400,0003) freight charges handling fee site preparation costs start up and testing costs special wiring and material costs cost basis $1,200,000 $30,000 $15,000 $50,000 $18,000 $2,000 $1,315,000
(Note: start-up and testing costs = $15 x 40 x 6 x 5 = $18,000)
8.7)
Depreciation allowances and book values: (a) depreciation rate = 1/5 for SL, (b) Depreciation rate = 2/5 for DDB
SL n 0 1 2 3 4 5 Dn $20,000 $20,000 $20,000 $20,000 $20,000 Bn $110,000 $90,000 $70,000 $50,000 $30,000 $10,000 Dn $44,000 $26,400 $15,840 $9,504 $4,256 DDB Bn $110,000 $66,000 $39,600 $23,760 $14,256 $10,000
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8.8) Given: I = $50,000, S = $5,000, N = 8 years;
DDB n 0 1 2 3 4 5 6 7 8 Dn $12,500 $9,375 $7,031 $5,273 $3,955 $2,966 $2,225 $1,674 Bn $50,000 $37,500 $28,125 $21,094 $15,820 $11,865 $8,899 $6,674 $5,000
8.9) Given: I = $200,000, n = 3 years, N = 8 years; Assuming that N ranges from 5 years to 8 years and the salvage value is no greater than $21,000, the DDB rates are as follows:
DDB n 0 1 2 3 4 5 6 7 8 Dn $50,000 $37,500 $28,125 $21,094 $15,820 $11,865 $8,899 $6,674 Bn $200,000 $150,000 $112,500 $84,375 $63,281 $47,461 $35,596 $26,697 $20,023
8.10) DDB switching to SL in year 5:
With switching n 0 1 2 3 4 5 6 7 Dn $12,857 $9,184 $6,560 $4,685 $3,905 $3,905 $3,905 Bn $45,000 $32,143 $22,959 $16,399 $11,714 $7,809 $3,905 $0
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 3 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.11) Given: I = $90,000, S = $12,000, N = 6 years (a)
Without switching DDB Dn Bn $30,000 $20,000 $13,333 $8,889 $5,778 $0 $90,000 $60,000 $40,000 $26,667 $17,778 $12,000 $12,000
n 0 1 2 3 4 5 6
(b) DDB switching to SL:
with switching From DDB to SL Dn Bn $30,000 $20,000 $13,333 $8,889 $5,778 $0 $90,000 $60,000 $40,000 $26,667 $17,778 $12,000 $12,000
n 0 1 2 3 4 5 6
Comments: The answer is unchanged because the salvage value is relatively high. 8.12)
1 (a) = 1.5 = 0.3 5 (b) D1 = (0.3)(15, 000) = $4,500
(c) B4 = (15, 000)(1 0.3) 4 = $3, 601.5
8.13) Given: I = $30,000, N = 5 years, S = $3,000
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 4 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
(a) DDB n 0 1 2 3 4 5 Dn $5,400 $5,400 $5,400 $5,400 $5,400 Bn $30,000 $24,600 $19,200 $13,800 $8,400 $3,000 Dn
(b) SL Bn $30,000 $24,600 $19,200 $13,800 $8,400 $3,000
$12,000 $7,200 $4,320 $2,592 $888
8.14) Given I = $78,000, S = $8,000, N = 12 years
DDB n 0 1 2 3 4 5 6 7 8 9 10 11 12 Dn $13,000 $10,833 $9,028 $7,523 $6,269 $5,224 $4,354 $3,628 $3,023 $2,519 $2,100 $1,750 Bn $78,000 $65,000 $54,167 $45,139 $37,616 $31,346 $26,122 $21,768 $18,140 $15,117 $12,597 $10,498 $8,748 n 0 1 2 3 4 5 6 7 8 9 10 11 12 SL Dn Bn
$5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833 $5,833
$78,000 $72,167 $66,333 $60,500 $54,667 $48,833 $43,000 $37,167 $31,333 $25,500 $19,667 $13,833 $8,000
(a)
D=
(b)
12 2 3 D3 = B2 B3 = $78, 000 (1 (2 /12) ) $78, 000 (1 (2 /12) )
= $9, 027.78
( $78, 000 $8, 000 ) = $5,833.33
8.15) Allowed depreciation amount
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 5 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
D=
55,000 ($85,000 $5,000) = $17,600 250,000
8.16)
D5,000 hrs =
5000 ($60, 000 $8, 000) 50, 000 = $5, 200
8.17) Truck A:
D= 25, 000 ($50, 000 $5, 000) = $5, 625 200, 000
Truck B:
D= 12, 000 ($25, 000 $2,500) = $2, 250 120, 000
Truck C:
D= 15, 000 ($18,500 $1,500) = $2,550 100, 000
Truck D:
D= 20, 000 ($35, 600 $3,500) = $3, 210 200, 000
8.18) (a) Book depreciation: Truck 22, 000 D1 = ($25, 000 $2, 000) = $2,530 200, 000 25, 000 D2 = ($25, 000 $2, 000) = $2,875 200, 000 Lathe and building:
Lathe DDB n 0 1 Dn $7,500 Bn $45,000 $37,500 n 0 1
Building
SL Dn Bn
$14,000
$800,000 $786,000
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 6 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
2 3 4 5 6 7 8 9 10 11 12
$6,250 $5,208 $4,340 $3,617 $3,014 $2,512 $2,093 $1,744 $1,454 $1,211 $1,009
$31,250 $26,042 $21,701 $18,084 $15,070 $12,559 $10,466 $8,721 $7,268 $6,056 $5,047
2 3 4 5 6 7 8 9 10 .
$14,000 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000 $14,000 ..
$772,000 $758,000 $744,000 $730,000 $716,000 $702,000 $688,000 $674,000 $660,000
.
50
$14,000
$100,000
(b) Allowed annual depreciation:
With switching From DDB to SL Dn Bn $7,500 $6,250 $5,208 $4,340 $3,617 $3,014 $2,512 $2,093 $1,866 $1,866 $1,866 $1,866 $45,000 $37,500 $31,250 $26,042 $21,701 $18,084 $15,070 $12,559 $10,466 $8,599 $6,733 $4,866 $3,000
n 0 1 2 3 4 5 6 7 8 9 10 11 12
The switching occurs at the 9th year.
8.19) (a) Straight-line
SL n 0 1 2 3 4 5 Dn $12,300 $12,300 $12,300 $12,300 $12,300 Bn
$135,000
$122,700 $110,400 $98,100 $85,800 $73,500
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 7 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
6 7 8 9 10
$12,300 $12,300 $12,300 $12,300 $12,300
$61,200 $48,900 $36,600 $24,300 $12,000
(b) Units of production 23, 450 D = ($135, 000 $12, 000) = $11,537.4 250, 000 (c) Working hours 2, 450 D = ($135, 000 $12, 000) = $10, 045 30, 000 (d) DDB
n 0 1 2 3 4 5 6 7 8 9 10 without switching DDB Dn Bn $135,000 $27,000 $108,000 $21,600 $86,400 $17,280 $69,120 $13,824 $55,296 $11,059 $44,237 $8,847 $35,389 $7,078 $28,312 $5,662 $22,649 $4,530 $18,119 $3,624 $14,496
8.20) Given: I = $37,000, S = $6,000, N = 8 years, and 5-year MACRS
n 0 1 2 3 4 5 6 7 8 $3,875 $3,875 $3,875 $3,875 $3,875 $3,875 $3,875 $3,875 Book Depreciation: SL Dn Bn $37,000 $33,125 $29,250 $25,375 $21,500 $17,625 $13,750 $9,875 $6,000
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 8 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
n 0 1 2 3 4 5 6
Tax Depreciation: 5-year MACRS Dep. Rate Dn Bn $37,000.00 0.2 $7,400.00 $29,600.00 0.32 $11,840.00 $17,760.00 0.192 $7,104.00 $10,656.00 0.1152 $4,262.40 $6,393.60 0.1152 $4,262.40 $2,131.20 0.0576 $2,131.20 $0.00
8.21) (a) Cost basis: $150, 000 + $5, 000 = $155, 000 (b)
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $22,143 $37,959 $27,114 $19,367 $13,834 $13,834 $13,834 $6,917 Bn $155,000 $132,857 $94,898 $67,784 $48,417 $34,584 $20,750 $6,917 ($0)
8.22) Let I denote the cost basis for the equipment.
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $14,286 $24,490 $17,493 $12,495 $8,925 $8,925 $8,925 $4,462 Bn $100,000 $85,714 $61,224 $43,732 $31,237 $22,312 $13,387 $4,462 ($0)
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 9 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.23) Given: I = $58,000, S = $8,000, N = 6 years, tax depreciation method = 7 year MACRS property class
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $8,286 $14,204 $10,146 $7,247 $5,176 $5,176 $5,176 $2,588 Bn $58,000 $49,714 $35,510 $25,364 $18,117 $12,941 $7,765 $2,588 ($0)
8.24) Given: I = $22,000 and 7-year MACRS property
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $3,143 $5,388 $3,848 $2,749 $1,963 $1,963 $1,963 $982 Bn $22,000 $18,857 $13,469 $9,621 $6,872 $4,909 $2,945 $982 ($0)
8.25) Given: I machine tool = $5, 000, I furniture = $125, 000, and I warehouse = $335, 000 Machine tool
n 0 1 2 3 4 Dep. Rate 0.3333 0.4444 0.1481 0.0741 Dn $1,667 $2,222 $741 $370 Bn $5,000 $3,333 $1,111 $370 $0
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 10 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
CNC machine
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $17,857 $30,612 $21,866 $15,618 $11,156 $11,156 $11,156 $5,578 Bn $125,000 $107,143 $76,531 $54,665 $39,046 $27,890 $16,734 $5,578 ($0)
Warehouse
n 0 1 2 3 . Dep. Rate 0.0139 0.0256 0.0256 . . Dn $4,653 $8,590 $8,590 Bn $335,000 $330,347 $321,757 $313,168
39 40
0.0256 0.0118
$8,590 $3,937
8.26) Given: Residential real property (27.5-year), I = $120,000
n 0 1 2 3 4 5
Dep. Rate 0.0076 0.0364 0.0364 0.0364 0.0197
Dn $1,288 $6,182 $6,182 $6,182 $3,348
Bn $170,000 $168,712 $162,530 $156,348 $150,167 $146,818
8.27) Given: Residential real property (27.5 year), I = $150,000 (a)
100% 5.5 D1 = ($150, 000) 27.5 12 = (0.016667)($150, 000) = $2500
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 11 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
..
$3,937 $0
(b) Total amount of depreciation over the 4-year ownership, assuming that the asset is sold at the end of the 4th calendar year:
n 0 1 2 3 4 Dep. Rate 0.01667 0.03636 0.03636 0.03485 Dn $2,500 $5,454 $5,454 $5,227 Bn $150,000 $147,500 $142,046 $136,592 $131,365
Total amount of depreciation allowed = $18,635. Note that the 4th year depreciation reflects the mid-month convention (11.5 months).
B4 = $150, 000 ( $2,500 + 2($5, 454) + $5, 227 ) = $150, 000 $18, 635 = $131,365
8.28) Given: I = $1,000,000, 39 years-MACRS real property
n 0 1 2 . Dep. Rate 0.007479 0.025641 . Dn $7,479 $25,641 Bn $1,000,000 $992,521 $966,880
8.29) Types of depreciation method (a). B (b). A (c). D (d). C (e). None 8.30) (a) Book depreciation methods: Straight-line method:
n 0 1 Dn $14,400 SL Bn $80,000 $65,600 Cum. Dn $14,400
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.
..
2 3 4 5
$14,400 $14,400 $14,400 $14,400
$51,200 $36,800 $22,400 $8,000
$28,800 $43,200 $57,600 $72,000
DDB method:
n 0 1 2 3 4 5 Dn $32,000 $19,200 $11,520 $6,912 $2,368 DDB Bn $80,000 $48,000 $28,800 $17,280 $10,368 $8,000 Cum. Dn $32,000 $51,200 $62,720 $69,632 $72,000
(b) Tax depreciation: 7-year MACRS
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $11,429 $19,592 $13,994 $9,996 $7,140 $7,140 $7,140 $3,570 Bn $80,000 $68,571 $48,980 $34,985 $24,990 $17,850 $10,710 $3,570 $0 Cum. Dn $11,429 $31,020 $45,015 $55,010 $62,150 $69,290 $76,430 $80,000
(c) Trade-in allowance
Book value of the old equipment (B3) Less: Trade-in allowance Unrecognized loss Cost of the new equipment plus: unrecognized loss on trade-in Cost basis of the new equipment
$34,985 $10,000 ($24,985) $92,000 $24,985 $116,985
Comments: If the old equipment was sold on the market (instead of trade-in), there would be no unrecognized loss. In that situation, the cost basis for the new equipment will be just $92,000. No half-year convention is assumed in the analysis.
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 13 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.31) (a) and (b):
n 0 1 2 3 4 5 6 7 8 Dep. Rate 0.1429 0.2449 0.1749 0.1249 0.0892 0.0892 0.0892 0.0446 Dn $542,857 $930,612 $664,723 $474,802 $339,144 $339,144 $339,144 $169,572 Bn $3,800,000 $3,257,143 $2,326,531 $1,661,808 $1,187,005 $847,861 $508,717 $169,572 ($0) Bn-1 $3,800,000 $3,257,143 $2,326,531 $1,661,808 $1,187,005 $847,861 $508,717 $169,572 Property taxes $45,600 $39,086 $27,918 $19,942 $14,244 $10,174 $6,105 $2,035
8.32)
Net income calculation:
Gross income Expenses: Sarlaries Wages Depreciation Loan interest Taxable income Income Taxes Net income $ $ $ $ $ $ $ $ 34,000,000 5,000,000 4,000,000 1,000,000 210,000 23,790,000 8,326,499 15,463,501
Note: Using the tax formula in Table 8.11, Total income taxes = $6,416,666 + 0.35($23,790,000 - $18,333,333) = $8,326,499.45 8.33) (a) Taxable income: $2,500,000 - $1,280,000 - $128,000 = $1,092,000 (b) Income tax calculation using the tax formula from Table 8.11: $113,900 + 0.34($1,092,000 - $335,000) = $371,280
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 14 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.34) (a) Depreciation expenses: Building (39-year class, placed in service in February):
100% 10.5 Dbuilding = $400, 000 39 12 = $400, 000(2.2436%) = $8,974 Equipment (5-year MACRS):
Dequipment = $200, 000 ( 20% ) = $40, 000
Total depreciation allowed in year 2008:
D = $8,974 + $40, 000 = $48,974
(b) Tax liability:
Sales revenue Expenses: Cost of goods sold Bond interest Depreciation Taxable income Income taxes Net income $2,500,000 $800,000 $50,000 $48,974 $1,601,026 $544,349 $1,056,677
Note: Income taxes = $113,900 + 0.34($1,601,026 - $335,000) = $544,349 from Table 8.11. 8.35) (a) Taxable gain: Ordinary gains = proceeds from old equipment - book value = $23, 000 $20, 000 = $3, 000 (b) Taxable income:
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 15 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
Gross income Interest income Bond interest income Expenses: Labor Materials Depreciation Interest Rental Taxable income Income taxes Net income
$ 2,250,000 $ 6,000 $ 4,000 $ 550,000 $ 385,000 $ 132,500 $ 22,200 $ $ , 45,000 , $ 1,125,300 $ 382,602 $ $ 742,698
Note: Income taxes = $113,900 + 0.34($1,125,300 - $335,000) = $382,602 Note: Ordinary gains are not included in this calculation, even though these gains will be treated as ordinary income. Of course, these figures can be included to find the total tax liabilities. (c) Marginal and average tax rates:
Marginal tax rate = 34% Average (effective) tax rate = $382, 602 / $1,125,300 = 34%
(d) Net cash flow:
Net income Adjustments: Add depreciation Proceeds from sale Subtract gains tax Net cash flow $ $ $ $ $ 742,698 132,500 23,000 (1,020) 897,178
8.36) (a) Income tax liability:
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 16 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
Gross revenues Expenses: Manufacturing Operating Interest Taxable operating income Adjustment: loss Taxable income Income taxes Net income
$ 1,200,000 $ $ $ $ $ $ $ $ 450,000 120,000 40,000 590,000 15,000 575,000 195,500 379,500
Note 1: book loss = $60,000 - $75,000 = ($15,000) Note 2: Income taxes = $113,900 + 0.34($575,000 - $335,000) = $195,500 (b) Operating income:
Taxable operating income Income taxes Net operating income $590,000 $200,600 $389,400
Note 1: The loss from disposal of the asset is not a part of operating activities, so it is not included in the operating income calculation. Note 2: Income taxes = $113,900 + 0.34($590,000 - $335,000) = $200,600
(c) Net cash flow:
Net income Adjustments: Add depreciation Proceeds from sale Short-term loan Net cash flow $ $ $ $ $ 379,500 45,000 60,000 50,000 534,500
8.37) (a) Disposed of in year 3:
allowed depreciation = $76, 000(0.20 + 0.32 + 0.192 / 2) = $46,816 book value = $76, 000 $46,816 = $29,184 loss = $20, 000 $29,184 = ($9,184)
(b) Disposed of in year 5:
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 17 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
allowed depreciation = $76, 000(0.20 + 0.32 + 0.192 +0.1152 + 0.1152 / 2) = $67, 244.8 book value = $76, 000 $67, 244.8 = $8, 755.2 Taxable gains = $10, 000 $8, 755.2 = $1, 224.8
(c) Disposed of in year 6: allowed depreciation = $76, 000 book value = $0 Taxable gains = $5, 000 8.38)
allowed depreciation = $300, 000(0.1429 + 0.2449 + 0.1749 +0.1249 + 0.0893 / 2) = $219, 675 book value = $300, 000 $219, 675 = $80,325 (a) If sold at $10,000:
losses = $10, 000 $80,325 = ($70,325) loss credit = $70,325(0.34) = $23,911 net loss = ($70,325) + $23,911 = ($46, 414) (b) If sold at $125,460: gains = $125, 460 $80,325 = $45,135 gains tax = $45,135(0.34) = $15,346 net gain = $45,135 $15,346 = $29, 789 (c) If sold at $200,000: gains = $200, 000 $80,325 = $119, 675 gains tax = $119, 675(0.34) = $40, 689.5 net gain = $119, 675 $40, 689.5 = $78,985.5
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 18 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.39) (a) Taxable operating income (Do not include ordinary gains):
Revenues: Gross income Expenses: Labor Materials Depreciation Office supplies Interest Rental Taxable income Income taxes Net income $ 4,250,000 $ 1,550,000 $ 785,000 $ 332,500 $ 15,000 $ 42,200 $ , 45,000 $ , $ 1,480,300 $ 503,302 $ $ 976,998
(b) Taxable gains: $43,000 - $30,000 = $13,000 (c) Total taxes:
income taxes = $113,900 + 0.34($1,480,300 $335,000) = $503,302 gain taxes = (0.34)($13,000) = $4,420 total taxes = $503,302 + $4,420 = $507,722
8.40) (a) Book value:
Total depreciation = $4, 000 $0 (3) 6 = $2, 000 B3 = $4, 000 $2, 000 = $2, 000 (b) Cost basis: Depreciation base = $14,000 + $800 + $200 = $15,000
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 19 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
(c) Taxable gains and gains taxes
Taxable gain = $2,500 $2, 000 = $500 Gains tax = (0.40)($500) = $200
(d) Capital gains:
B3 = $2, 000 ordinary gain = $4, 000 $2, 000 = $2, 000 gain taxes = $2, 000(0.40) = $800 capital gain = $5, 000 $4, 000 = $1, 000 capital gain taxes = $1, 000(0.40) = $400 total gains taxes = $800 + $400 = $1, 200
(e) Book value at the end of year 3 under 175% DB:
B3 = $1, 422
With switching From DDB to SL Dn Bn 0 1 2 3 4 5 6 $1,167 $826 $585 $474 $474 $474 $4,000 $2,833 $2,007 $1,422 $948 $474 $0
n
(f) Optimal time to switch: during the 4th year
8.41) Note: Personal income tax brackets and amount of personal exemption are updated yearly, so you need to consult the IRS tax manual for the tax rates as well as the amount of exemption that are applicable to your tax year. In this solution, we assumed the tax rate schedule of year 2007. For 2007, the amount of personal exemption is $3,400.
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 20 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
(a) Business form: Corporate Corporate taxes:
Gross income Expenses: Salary Business expenses Taxable income Income taxes Year 1 $180,000 $80,000 $25,000 $75,000 $13,750 Year 2 $195,000 $90,000 $30,000 $75,000 $13,750 Year 3 $210,000 $100,000 $40,000 $70,000 $12,500
Personal income taxes (assuming that the personal exemptions as well as the individual tax rates remain unchanged over the 3-year period) :
$ $ $ $ $ Year 1 80,000 13,600 16,000 50,400 6,778 $ $ $ $ $ Year 2 90,000 13,600 18,000 58,400 7,978 $ $ $ $ $ Year 3 100,000 13,600 20,000 66,400 9,448
Gross income Deductions: Exemptions Itemized deduction Taxable income Income taxes
Note that, in Year 2007, the personal income tax rates for married filing jointly are as follows:
Schedule Y-1 Married Filing Jointly or Qualifying Widow(er) If taxable income But not over-is over-$0 $15,650 $63,700 $128,500 $195,850 $349,700 $15,650 $63,700 $128,500 $195,850 $349,700 no limit
The tax is: 10% of the amount over $0 $1,565.00 plus 15% of the amount over 15,650 $8,772.50 plus 25% of the amount over 63,700 $24,972.50 plus 28% of the amount over 128,500 $43,830.50 plus 33% of the amount over 195,850 $94,601.00 plus 35% of the amount over 349,700
Total taxes = corporate taxes + personal taxes: Year 1 = $13, 750 + $6, 778 = $20,528 Year 2 = $13, 750 + $7,978 = $21, 728 Year 3 = $12,500 + $9, 448 = $21,948
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 21 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
(b) Business form: sole ownership
Year 1 Gross income Expense: Exemptions Itemized deduction Business expenses Taxable income Income taxes $13,600 $16,000 $25,000 $125,400 $24,198 $13,600 $18,000 $30,000 $133,400 $26,345 $13,600 $20,000 $40,000 $136,400 $27,185 $180,000 Year 2 $195,000 Year 3 $210,000
The corporate business form is preferred.
8.42) (a) Incremental Operating income:
Operating Costs Year 1 Year 2 $15,000,000 $15,000,000 $6,000,000 $1,200,000 $1,224,500 $6,575,500 $2,301,425 $4,274,075
Revenue Expenses: Mfg. cost $6,000,000 O&M costs $1,200,000 $714,500 Depreciation Taxable income $7,085,500 Income taxes (35%)$2,479,925 Net income $4,605,575
Year 3 Year 4 Year 5 $15,000,000 $15,000,000 $15,000,000 $6,000,000 $1,200,000 $874,500 $6,925,500 $2,423,925 $4,501,575 $6,000,000 $6,000,000 $1,200,000 $1,200,000 $624,500 $223,250 $7,175,500 $7,576,750 $2,511,425 $2,651,863 $4,664,075 $4,924,888
(b) Gains or losses:
Total depreciation = $3, 661, 250 B5 = $5, 000, 000 $3, 661, 250 = $1,338, 750 Taxable gains = $1, 600, 000 $1,338, 750 = $261, 250
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 22 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
8.43) (a) Let ic denote the interest rate for a corporate bond: 9.5% = ic (1 0.25) ic = 12.67% (b) Let A denote the annual interest payment from the corporate bond. Since Julies opportunity cost rate is 9.5%, we can establish the following equivalence relationship:
$50, 000 = (1 0.25) A( P / A,9.5%,3) + [$50, 000 + (1 0.25)(0.05)($50, 000)]( P / F ,9.5%,3) = 1.8817 A + $39,510.79 Solving for A yields
A = $5,574.39
This is equivalent to receiving a bond interest rate of ic = $5,574.39 / $50, 000 = 11.15% (c)
PW(9.5%) = $50, 000 + [$75, 000 ($75, 000 $50, 000)(0.25)]( P / F ,9.5%,3) = $2,363.70 > 0 IRR = 11.20% > 9.5% Better than investment in bonds.
Investment in a tract of land is more economically desirable.
Instructor Solutions Manual to accompany Fundamentals of Engineering Economics, Second Edition, by Chan S. Park. ISBN-13: 9780132209618. 2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction, storage 23 in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.