Question

In: Finance

1. A firm is considering purchasing an asset that will cost $5 million. Other depreciable costs...

1. A firm is considering purchasing an asset that will cost $5 million. Other depreciable costs include $800,000 in installation costs. if the asset is classified as a 5 year class what is the annual depreciation for years 1, 3, and 6 for this assist, using the fixed depreciation percentages given by MACRS? (20%, 19.20%, 5.76%and 8.93% respectively)

a. $1,856,000, $1,113,600, and $334,080 for year 1, 3, and 6 respectively

b. $1,160,000, $1,113,600, and $334,080 for year 1, 3, and 6 respectively

c. $1,160,000, $1,113,600, and $668,160 for year 1, 3, and 6 respectively

d. $5,800,000, $1,160,000 and $1,113,600 for year 1, 3, and 6 respectively

2. With a line of credit, the bank is compensated

a. based on the outstanding balance of the loan

b. based on the principal value of the credit line

c. exclusively with a fixed annual payment

d. based on a fixed interest rate tied to the T-bill rate

3. The current book value of an asset serves as the basis for determining the gain or loss at disposal.

a. True

b. False

Solutions

Expert Solution

QUESTION-1

The five-year life MACRS depreciation rates are 20%, 32%, 19.20%, 11.20%, 11.20% and 5.76% per the year1, year2, year3, year4, year 5 and year 6 respectively.

Years

Annual Depreciation

Year 1

8,960.00

Year 3

5,376.00

Year 6

3,225.60

Depreciation for Year 1 = $1,160,000 [$58,00,000 x 20%]

Depreciation for Year 3 = $1,113,600 [$58,00,000 x 19.20%]

Depreciation for Year 6 = $334,080 [$58,00,000 x 5.76%]

“Hence, the answer would be “(b). $1,160,000, $1,113,600, and $334,080 for year 1, 3, and 6 respectively”

QUESTION-2

With a line of credit, the bank is compensated “based on the principal value of the credit line”

QUESTION-3

“TRUE”. The current book value of an asset serves as the basis for determining the gain or loss at disposal.

-The gain or loss at disposal is the difference between the Book Value of the asset and the sale proceeds on the disposal of asset.

-There will be a loss on sale of assets if the sales value of asset is lower than the Book value of the assets

-There will be a gain on sale of assets if the sales value of asset is higher than the Book value of the assets.


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