.

Electronic Measurement and Control Company (EMCC) has

developed a laser speed detector that emits infrared light, which
is invisible to humans and radar detectors alike. For full-scale
commercial marketing, EMCC needs to invest $5 mil- lion in
new manufacturing facilities. The system is priced at $3,000 per
unit. The company expects to sell 5,000 units annually over the
next five years. The new manufacturing facilities will be
depreciated according to a seven-year MACRS property class.
The expected salvage value of the manufacturing facilities at the
end of five years is $1.6 million. The manufacturing cost for the
detector is $1,200 per unit, excluding depreciation expenses. The
operating and maintenance costs are expected to run to $1.2
million per year. EMCC has a combined federal and state income
tax rate of 35%, and undertaking this project will not change this
cur- rent marginal tax rate.

. (a)

Determine, for the next five years, the incremental taxable

income, income taxes, and net income due to undertaking this
new product.

Year
Gross Revenue
Facilities
Maintenance

1
$9,000,000.00
($1,000,000)
($1,200,000)

2
$9,000,000.00
($1,000,000)
($1,200,000)

3
$9,000,000.00
($1,000,000)
($1,200,000)

4
$9,000,000.00
($1,000,000)
($1,200,000)

5
$9,000,000.00
($1,000,000)
($1,200,000)

Depreciation
Taxable
income

$(714,500.00) $(1,224,500.00)

$(874,500.00)

$(624,500.00)

$(446,500.00)

$6,085,500.00

$5,925,500.00

$6,175,500.00

$6,353,500.00

$5,575,500.00

Year
Income Tax

1
$2,530,075.00

2
$2,708,575.00

3
$2,586,075.00

4
$2,498,575.00

5
$2,436,275.00

Taxes (35%)
Net Income

$2,129,925.00
$3,955,575.00

$1,951,425.00
$3,624,075.00

$2,073,925.00
$3,851,575.00

$2,161,425.00
$4,014,075.00

$2,223,725.00
$4,129,775.00

. (b)

Determine the gains or losses associated with the disposal of the

manufacturing facilities at the end of five years.
(