An agricultural corporation that paid 53% in income tax wanted to build a grain elevator designed to last twenty-five (25) years at a cost of $80,000…

The annual estimated tax is calculated based on the taxable income, which is the annual income less all deductible expenses, including annual operating expenditures and depreciation.
1. Calculate Annual Depreciation (Straight-Line): (Initial Cost - Salvage Value) / Useful Life ($80,000 - $0) / 25 years = $3,200 per year
2. Calculate Taxable Income: (Annual Income - Annual Expenditures) - Annual Depreciation ($22,500 - $12,000) - $3,200 = $7,300
3. Calculate Annual Tax: Taxable Income × Tax Rate $7,300 × 0.53 = $3,869

B. $5,565: This is the tax on gross profit ($10,500) without deducting the allowable annual depreciation expense, leading to an overstatement of tax.
C. $10,500: This figure represents the annual gross profit (income minus expenditures) before accounting for depreciation and taxes.
D. $11,925: This is the tax calculated on the total annual income ($22,500), incorrectly ignoring both operating expenditures and depreciation deductions. ---

1. AACE International, Skills & Knowledge of Cost Engineering, 6th Ed., (Morgantown, WV: AACE International, 2012). Section 7.3, "Cost, Production, and Revenue," outlines the calculation of after-tax cash flow, which requires determining taxable income by subtracting operating costs and depreciation from revenue. The tax is then calculated from this taxable income.

2. Park, Chan S., Contemporary Engineering Economics, 6th Ed., (Pearson, 2016). Chapter 10, "Corporate Income Taxes," Section 10.2.1, explicitly defines the calculation of taxable income as: Taxable Income = Gross Income – All expenses except capital investment – Depreciation. This directly supports the methodology used.

3. AACE International, Recommended Practice 10S-90: Cost Engineering Terminology, (Morgantown, WV: AACE International, June 29, 2012). Defines "DEPRECIATION" (p. 40) as an allowance and "INCOME TAX" (p. 62) as a levy on income. The relationship between these terms is fundamental to determining the tax liability of a capital project.