M6A1 Textbook Assignment: Comprehensive Problems

As Benjamin Franklin said, two things are inevitable: death and taxes. In this module, we
examined the structure of taxes in the US. These included sales taxes, gasoline taxes, property
taxes, and state and federal income taxes. Income taxes are part of most real-world problems
and often have a substantial impact that must be considered. Economic analysis weighs existing
versus new facilities. For most engineers, the problem is less likely to be one of building a new
plant; rather, the goal is more often keeping a present plant operating economically. We are
not choosing between new ways to perform the desired task. Instead, we have equipment
performing the task, and the question is: Should the existing equipment be retained or
replaced?

After reading Chapters 12 and 13, review the additional supplemental videos, articles, and
PowerPoint presentation to help prepare you for working through these problems.

Problems

From Chapter 12

Individual/Joint Taxes

An unmarried taxpayer with no dependents expects an adjusted gross income of $70,000 in a

given year. His non-business deductions are expected to be $6,000.

(a) What will his federal income tax be?

(b) He is considering an additional activity expected to increase his adjusted gross income.
If this increase should be $16,000 and there should be no change in non-business
deductions or exemptions, what will be the increase in his federal income tax?

Corporate Taxes

A company wants to set up a new office in a country where the corporate tax rate is as follows:
15% of the first $50,000 of profits; 25% of the next $25,000; 34% of the next $25,000; and 39%
of everything over $100,000. Executives estimate they will have gross revenues of $500,000,
total costs of $300,000, $30,000 in allowable tax deductions, and a one-time business start-up
credit of $8,000. What is the taxable income for the first year and how much should the
company expect to pay in taxes?

Unknowns

The management of a private hospital is considering the installation of an automatic telephone

switchboard, which would replace the manual switchboard and eliminate the attendant
operators position. The class of service provided by the new equipment is estimated to be at
least equal to the present method of operation. To provide the telephone service, five
operators work three shifts per day, 365 days per year. Each operator earns $25,000 per year.
Company-paid benefits and overhead are 25% of wages. Money costs 8% after income taxes.
Combined federal and state income taxes are 40%. Annual property taxes and maintenance are
2.5% and 4% of investment, respectively. Depreciation is 15-year straight line. Disregarding
inflation, how large an investment in the new equipment can be economically justified by
savings obtained by eliminating the present equipment and labor costs? The existing
equipment has zero salvage value.

From Chapter 13

Replacement Problems

A machine that has been used for one year has a salvage value of $10,000 now, which will drop
by $2,000 per year. The maintenance costs for the next 4 years are $1250, $1450, $1750, and
$2250. Determine the marginal cost to extend service for each of the next 4 years if the MARR
is 8%.

Replacement Problems

An electric oil pumps first cost is $45,000 and the interest rate is 10%. The pumps end of year
salvage values over the next 5 years are $42K, $40K, $38K, $32K, and $26K. Determine the
pumps economic life.

After the Tax

The Ajax Company purchased a railroad tank car 8 years ago for $60,000. It is being
depreciated by SOYD depreciation, assuming a 10-year depreciable life and a $7,000 salvage
value. The tank car needs to be reconditioned now at a cost of $35,000. If this is done, it is
estimated the equipment will last for 10 more years and have a $10,000 salvage value at the
end of the 10 years.

On the other hand, the existing tank car could be sold now for $10,000 and a new tank
purchased for $85,000. The new tank car would be depreciated by MACRS depreciation. It is
estimated actual salvage value after 10 years would be $15,000. In addition, the new tank car
would save $10,000 per year in maintenance costs, compared to the reconditioned car.

Based on a 15% before-tax rate of return, determine whether the existing tank car should be
reconditioned or a new one purchased. (Note: The problem statement provides more data
than are needed, which is typical of real situations.)