Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 3

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 million in new manufacturing facilities. The system is priced at$5,000 perunit. 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 of35%, and undertaking this project will not change this current 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.
(b) Determine the gains or losses associated with the disposal of the manufacturing facilities at the end of five years.