1. Suppose you buy an asset for $1,000,000. If it costs $100,000 for shipping an
ID: 2762913 • Letter: 1
Question
1. Suppose you buy an asset for $1,000,000. If it costs $100,000 for shipping and installation, how much is your investment outlay?
2. Suppose you buy an asset for $100,000 that is depreciated for tax purposes over 20 years using straight-line depreciation. Break down
the tax effects upon sale of this asset after five years if the sales
price is: (a) $125,000 (b) $100,000 (c) $75,000 (d) $50,000
3. The Schwab Steel Company is considering two different wire sol-dering machines. Machine 1 has an initial cost of $100,000, costs $20,000 to set up and is expected to be sold for $20,000 after 10 years. Machine 2 has an initial cost of $80,000, costs $30,000 to set up and is expected to be sold for $10,000 after 10 years. Both machines would be depreciated over 10 years using straight-linedepreciation. Schwab has a tax rate of 35%.
(a)
What are the cash flows related to the acquisition of each machine?
(b)
What are the cash flows related to the disposition of each machine?
Explanation / Answer
1.
Price of assets = $1,000,000
Installation cost = $100,000
Total investment = $1,000,000 + $100,000
= $1,100,000
Hence, total investment outlay is $1,100,000.
2.
Price of assets = $100,000
Life of assets = 20 year
Company using straight line method of depreciation. So annual depreciation is calculated bellow:
Annual depreciation = $100,000 / 20
= $5,000
Value of assets after five year = $100,000 -$5,000 × 5
= $75,000
Value of assets after 5 year will be $75,000.
Hence, option (C) is correct answer.
3.
a.
Acquisition cost of machine 1
Price of assets = $100,000
Installation cost = $20,000
Acquisition cost = $100,000 + $20,000
= $120,000
Hence, total Acquisition cost for machine 1 is $120,000.
Acquisition cost of machine 2
Price of assets = $80,000
Installation cost = $30,000
Acquisition cost = $80,000 + $30,000
= $110,000
Hence, total Acquisition cost for machine 2 is $110,000.
b.
Cash flow related to disposition of machine 1 = $20,000
Cash flow related to disposition of machine 2 = $10,000
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