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A used concrete pumping truck can be purchased for $125,000. The operation costs are expected to be $65,000 the first year and increase 5% each year thereafter. As a result of the purchase, the company will see an increase in income of $100,000 the first year and 5% more each subsequent year. The company uses straight-line depreciation. The truck will have a useful life of five (5) years and no salvage value. Management would like to see a 10% return on any investment. The company's tax rate is 28%.
The taxable income in year number 5 is:
To calculate the taxable income in the fifth year:
Income in year 5:
Year1income=100,0001.054121,551text{Year 1 income} = 100,000 times 1.05^4 approx 121,551Year1income=100,0001.054121,551
Costs in year 5:
Year1cost=65,0001.05479,008text{Year 1 cost} = 65,000 times 1.05^4 approx 79,008Year1cost=65,0001.05479,008
Taxable Income:
TaxableIncome=IncomeCostsDepreciation121,55179,00825,00017,543text{Taxable Income} = text{Income} - text{Costs} - text{Depreciation} approx 121,551 - 79,008 - 25,000 approx 17,543TaxableIncome=IncomeCostsDepreciation121,55179,00825,00017,543
So, the correct answer is A. $17,543.
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