heads to replace a line that is becoming obsolete . To begin manufacturing them , the company will have to invest $ 1,800,000 in new equipment . The new clubs are expected to generate an increase in operating cash inflows of $ 750,000 per year for the next 10 years . The company has determined that the existing line could be sold to a competitor for $ 250,000 .
a . How should the $ 1,000,000 in development costs be classified ? b . How should the $ 250,000 sale price for the existing line be classified ? c . Depict all the known relevant cash flows on a time line .
P11 – 7 Book value Find the book value for each of the assets shown in the accompanying table , assuming that MACRS depreciation is being used . See Table 4.2 on page 120 for the applicable depreciation percentages .
Asset Installed cost Recovery period ( years ) |
Elapsed time |
since purchase ( years ) |
A |
$ 950,000 |
5 |
3 |
B |
40,000 |
3 |
1 |
C |
96,000 |
5 |
4 |
D |
350,000 |
5 |
1 |
E |
1,500,000 |
7 |
5 |
P11 – 8 Book value and taxes on sale of assets Troy Industries purchased a new machine 3 years ago for $ 80,000 . It is being depreciated under MACRS with a 5-year recovery period using the percentages given in Table 4.2 on page 000 . Assume a 40 % tax rate .
a . What is the book value of the machine ? b . Calculate the firm ’ s tax liability if it sold the machine for each of the following amounts : $ 100,000 ; $ 56,000 ; $ 23,200 ; and $ 15,000 .