CASE STUDY RESEARCH PAPER- REPORT ( 48 Hours - A+ Score Required)
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5.CONE-Presentation.pptxCase Study: Income tax for the company 3DRobotics
Ana Patricia Lopez
CONE430
Spring 2014
Professor Hossein Hemati
Case Study:
The American company “3DRobotics” was created to produce drones. The firm bought a land for $525,000, had a $900,000 factory building erected and installed $500,000 worth of machines and packing equipment. The plant was ready starting April 1, 2012. Gross income for the year was $450,000. Supplies and expenses excluiding capital expenditures were $100,000. The plant will use the Modified cost recovery system (MACRS)
Objective
What is the first year depreciation charge?
What is the first year taxable income?
Case continues
The company wants to buy a used car of $3500 to use for shipping and delivery. It is a 5-useful life vehicle and it is estimated that the company will save $800 per year. The salvage value is $750.
What is the before tax rate of return?
What is the rate of return on this capital expenditure?
MACRS depreciation. 3DRobotics is a private property. From table 11-2, it is a 7-year property class.
Depreciation deduction:
D_t = depreciation deduction in year t
B= cost basis being depreciated
r_t= appropiate MACRS percentage rate
Dt(equipment) = 500,000(14.29%)=$71,450
Depreciation for real property
Since the company is place in service in the month of april, we look for the value in table 11-4 (p.369) and the depreciation for real property:
Total 1st year MACRS depreciation: $71,450+16,371 = $87,8921
1st year taxable income and federal income
Taxable income= gross income-all expenditures except capital expenditures- depreciation and depletion charges
Taxable income =$450,000+$100,000+$87,821 = $262,179
Federal income
Since the taxable income is within the range of $100,000-$335,000, from table 12-2 (p.395)
Federal income = $262,179 + 39% ($262,179
100,000)
= $85,499
Before tax rate of return (car case)
| before tax rate of return | |
| year | before-tax cash flow |
| -3,500 | |
| 0 | 800 |
| 1 | 800 |
| 2 | 800 |
| 3 | 800 |
| 4 | 800 |
| 5 | 800+750 |
Before tax rate of return: IRR_BT= 3500=800(P/A,I,5) +750(P/F,i,5)
With 18%:
there is a rate of return of = 8.8%
Rate of return on capital expenditure
B-S/N = 3550-750 = $550 per year
After tax rate of return = 10.55%
The calculation follows:
| a | b | c | d | ||
| year | before-tax rate of return.cash flow | straight line depreciation | (taxable income) | 34%income tax | after tax cash flow |
| 0 | -$3,500.00 | a-b | taxable income * -.34 | a+d | |
| 1 | $800.00 | $550.00 | $250.00 | -$84.00 | $716.00 |
| 2 | $800.00 | $550.00 | $250.00 | -$84.00 | $716.00 |
| 3 | $800.00 | $550.00 | $250.00 | -$84.00 | $716.00 |
| 4 | $800.00 | $550.00 | $250.00 | -$84.00 | $716.00 |
| 5 | $800.00 | $550.00 | $250.00 | -$84.00 | $716.00 |
Results and conclusions
3DRobotics is a company that bought land at $525,000, $900,000 building and $500,000 of material to build drones. Their MACRS year depreciation is $71,450 according to table 11-2 of the book. This is a private property and %14.29 will be deducted from the material worth $500,000.
The property’s federal income tax is calculated based on the gross income and expenditures and depreciation/depletion charges.
The company’s used car of $3,500 rate of return (before tax) is 8.8% and the rate of return of expenditure is 10.55%.
