. 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 1 2 3 4 5Gross Revenue $9,000,000.00 $9,000,000.00 $9,000,000.00 $9,000,000.00 $9,000,000.00Facilities ($1,000,000) ($1,000,000) ($1,000,000) ($1,000,000) ($1,000,000)Maintenance ($1,200,000) ($1,200,000) ($1,200,000) ($1,200,000) ($1,200,000)

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

) $(874,500.00) $(624,500.00) $(446,500.00)Taxable income $6,085,500.00 $5,575,500.00 $5,925,500.00 $6,175,500.00 $6,353,500.00

incometax=3,400,000+0.35 (X−10,000,000)

Year 1 2 3 4 5Income Tax $2,530,075.00 $2,708,575.00 $2,586,075.00 $2,498,575.00 $2,436,275.00

Taxes (35%) $2,129,925.00 $1,951,425.00 $2,073,925.00 $2,161,425.00 $2,223,725.00Net Income $3,955,575.00 $3,624,075.00 $3,851,575.00 $4,014,075.00 $4,129,775.00

. (b) Determine the gains or losses associated with the disposal of the manufacturing facilities at the end of five years.

Total allowed de preciation=$5,000,000 (.1429+.2449+.1749+.1249+ .08932 )

¿ $3,661,250BookValue=$5,000,000−$ 3,661 ,250¿ $1,338,750

BookValue<SalvageValue<Cost BasisOrdinaryGains=SalvageValue−book value¿ $1,600,000−$1,338,750=$261,250Gains tax (35 % )=.35∗($ 261,250 )=$91,437.5

Net proceeds¿ sale=Salvage value−gains tax¿ $1,600,000−$91,437.5=$ 1,508,562.5