1. Joe started a business in 2001 renting hot tubs for parties. He bought three tubs at that time for $1,200 each. In 2003, he had rental income of $12,390 and operating expenses of $4250. The hot tubs fall into the MACRS 7-year class. What is Joe's after-tax cash flow for 2003 (Year 2)?
Hint: To compute after-tax cash flow for Year 2, you must calculate the income taxes and subtract that amount from the total taxable income in Year 2.
2. A contractor expects to have an annual taxable income of $400,000 from its regular business for the next 3 years. The contractor is considering buying a new piece of equipment that costs $115,000. The equipment falls into the MACRS seven year class and will have an estimated salvage value of $25,000 at the end of five years. The equipment is expected to generate additional before-tax revenue
of $90,000 per year.
a) Determine the annual marginal tax rates for the next 3 years with the new equipment.
b) Determine the annual income taxes to be paid for the next 3 years with the new equipment.