1. Cash flow at disposal of an asset is calculated as the disposal value plus th
ID: 2741495 • Letter: 1
Question
1. Cash flow at disposal of an asset is calculated as the disposal value plus the _______ on the loss.
A. alternative minimum tax
B. tax due
C. tax shield
D. tax credit
2. Anthony Inc. purchases a machine for $15,000. This machine qualifies as a 5-year recovery asset under MACRS with the fixed percentages as follows for years 1,2,3, and 4 respectively: 20%, 32%, 19.2% and 11.52%. The tax rate is 33%. If the machine is sold at the end of 4 years for $4,000, what is the cash flow from disposal?
A. $3,535.36
B. $3,408.22
C.$2,592.00
D. $1,408.00
3. When calculating the after-tax weighted average cost of capital, which of the following costs are adjusted for taxes in the equation?
A. the before tax cost of equity
B. the before tax cost of debt
C. the before tax of preferred stock
D. all the above
Explanation / Answer
Answer:1 C. tax shield
Because loss on disposal of assets creates a tax savings and is called a loss tax shield and added in disposal value.
Options A, B and D are not relevant.
Answer:2 A. $3535.36
Book value of assets at the end of 4 years=Original cost-Accumulated dep
=15000-(15000*(20%+32%+19.2%+11.52%))
=2592
Gain on sale of assets=4000-2592=1408
Tax on gain=1408*33%=464.64
Cash Flow from disposal=4000-464.64
=3535.36
Answer:3 B. the before tax cost of debt
Because interest expense is tax deductible for income tax purposes and cost of equity and preference shares are not tax deductible.
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