Question

1. A ready-mix concrete company plans to buy a new fleet of 10 delivery trucks at $185,000 each. They are 5 year assets as per MACRS. The gross (pre-tax) income from operating these trucks is shown below. Fill in the rest of the table to determine their post-tax income flow. The company is in a 25% tax bracket.

   Year	Pre-Tax Income $	Depreciation $	Taxable income $	Tax $	Post-Tax Income $
   1	400,000
   2	430,000
   3	450,000
   4	50,000*
   5	300,000
   6	250,000

   * A bad year for the ready-mix business

Answer 1

With 5-Year MACRS, the depreciation rates in years 1 to 6 are 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%.

Depreciation amount in each year = price per truck * number of trucks * depreciation rate.

1 2 3 4 5 6 B Pre-tax income 400,000 430,000 450,000 50,000 300,000 250,000 C D E F Depreciation Depreciation Taxable Post-tax rate $ income Tax income 20.00% 370,000 30,000 7,500 22,500 32.00% 592,000 (162,000) (40,500) (121,500) 19.20% 355,200 94,800 23,700 71,100 11.52% 213,120 (163,120) (40,780) (122,340) 11.52% 213,120 86,880 21,720 65,160 5.76% 106,560 143,440 35,860 107,580

AB F 1 Year Pre-tax income Depreciation rate Depreciation $ Taxable income Tax 21 400000 0.2 =185000*10*C2 =B2-D2 =E2*25% 3 2 430000 0.32 =185000*10*C3 =B3-D3 =E3*25% 4 3 450000 0.192 =185000*10*C4 =B4-D4 =E4*25% 5 4 50000 0.1152 =185000*10*C5 =B5-D5 =E5*25% 65 300000 0.1152 =185000*10*C6 =B6-D6 =E6*25% 76 250000 0.0576 =185000*10*C7 =B7-D7 =E7*25% Post-tax income =E2-F2 =E3-F3 =E4-F4 =E5-F5 =E6-F6 =E7-F7