Question
In: Finance
The Jones Company has just completed the third year of a five-year MACRS recovery period for...
The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $298,000.
a. What is the book value of the equipment?
b. If Jones sells the equipment today for $183,000 and its tax rate is 35 % what is the after-tax cash flow from selling it?
c. Just before it is about to sell the equipment, Jones receives a new order. It can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume the remainder of the machine's useful life.)
Note: Assume that the equipment is put into use in year 1.
Solutions
Expert Solution
Answer (a):
Book value of the equipment = $85,824.00
Working:
Given:
The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $298,000
Answer (b):
Book value of equipment = $85,824
Sale value of the equipment today = $183,000
Tax on gain = (183000 - 85824) * 35% = $34,011.60
After-tax cash flow from selling it = 183000 - 34011.60 = $148,988.40
After-tax cash flow from selling it = $148,988.40
Answer (c):
It can take the new order if it keeps the old equipment.
Hence the answer is:
Yes, cost to taking the order is the lost after tax cash flow of $148,988.40
jeff jeffy answered 8 months agoRelated Solutions
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Rounded Depreciation Percentages by Recovery Year Using MACRS
for
First Four
Property Classes
Percentage
by recovery year*
Recovery year
3
years
5
years
7
years
10
years
1
33%
20%
14%
10%
2
45%
32%
25%
18%
3
15%
19%
18%
14%
4
7%
12%
12%
12%
5
12%
9%
9%
6
5%
9%
8%
7
9%
7%
8
4%
6%
9
6%
10
6%
11
4%
Totals
100%
100%
100%
100%
A
firm is considering renewing its equipment to...
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