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.