South-western Federal Taxation 2018: Individual Income Taxes
South-western Federal Taxation 2018: Individual Income Taxes
41st Edition
ISBN: 9781337385886
Author: William H. Hoffman, James C. Young, William A. Raabe, David M. Maloney, Annette Nellen
Publisher: Cengage Learning
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Chapter 18, Problem 22DQ
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Explain the tax implications of accepting the contract proposal of 15 months completion period.

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The X Company is considering purchasing a business machine for $100,000. An alternative is to rent it for $35,000 at the beginning of each year. The rental would include all repairs and services. If the machine is purchased, a comparable repair and service contract can be obtainedfor $1,000 per year. The salesperson of the business machine firm has indicated that the expected useful service life of this machine is five years, with zero market value, but the company is not sure how long the machine will be needed. If the machine is rented, the company can cancel the lease at the end of any year. Assuming an income tax rate of 25%, a straight-line depreciation charge of $20,000 for each year the machine is kept, and an after-tax MARR of 10%, prepare an appropriate analysis to help the firm decide whether it is more desirable to purchase or rent.
DJDC Machinery has been making a part for its industrial rotary gear shaving machine. The engineers are asked to investigate alternative ways of obtaining the part, as the unit cost for the part currently is not competitive in the marketplace. DJDC needs 25,000 parts per year for the next three years. At that point, any capital equipment could be sold. DJDC tax rate is 40%, and its interest rate is 12%.• Option A: Continue to produce the part with the old machine. The machine has been fully depreciated. The current machine could be sold for $6,000 in three years. Making the part with the old machine involves the following: Variable costs for the part are $4 for direct materials, $3 for direct labor, and $2 for variable manufacturing overhead.• Option B: Purchase the part from outside for $13 per part, including shipping.• Option C: Replace the old machine with the new model. The newer model would cost $55,000 and would depreciate. The new machine, if purchased, could be sold for…
Which one should you choose?

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South-western Federal Taxation 2018: Individual Income Taxes

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