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


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