1. Use the table below to answer this question. Ronnie\'s Custom Cars purchased
ID: 2776111 • Letter: 1
Question
1.
Use the table below to answer this question.
Ronnie's Custom Cars purchased some fixed assets two years ago for $35,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,500 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent?
$18,582.00
$16,297.20
$14,926.32
$16,800.00
$19,500.00
3.
Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of year 2?
$216,000 / [(1 + .20)(1 + .32)]
4.
Consider an asset that costs $595,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $180,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations.)
Aftertax salvage value
5.
rev: 09_18_2012
$25,487,700
$19,503,040
$24,274,000
$23,000,000
$21,726,000
$
Use the table below to answer this question.
Explanation / Answer
1)
Book value at the end of year 2 = $35,000 (1- 0.2 -0.32) = $16800
Tax on sale = ($19,500- $16,800)X .34 = $918
After-tax cash flow = $16800- $918 = $18582
3)$216,000 ×(1 - .2 - .32)
This is because 1st year as per the table we reduce the book value by 20% and in the 2nd year we further reduce by 32%
4)
Per year depriciation by straigt line method = 595000/7 = 85000
Book value at the end of year 5 = 170,000
Tax on sale = ($180,000- $ 170,000)X .34 = $3400
After-tax cash flow = $180,000- $3,400 = =176,600
5)
The $6 million acquisition cost of the land six years ago is a sunk cost. The $9.8 million current after-tax value of the land is an opportunity cost if the land is used rather than sold off. The $13.2 million cash outlay and $1,274,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper year zero cash flow to use in evaluating this project is $9,800,000 + 13,200,000 + 1,274,000 = $24,274,000
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