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accounting problems

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Question;29. The;Spartan Technology Company has a proposed contract with the Digital Systems;Company of Michigan.;The initial investment in land and equipment will be $120,000. Of this amount;$70,000 is subject to five-year MACRS depreciation. The balance is in;nondepreciable property. The contract covers six years, at the end of six;years, the nondepreciable assets will be sold for $50,000, which is their;original cost. The depreciated assets will have zero resale value.;The contract will require an additional investment of $55,000 in;working capital at the beginning of the first year and, of this amount, $25,000;will be returned to the Spartan Technology Company after six years.;The investment will produce $50,000 in;income before depreciation and taxes for each of the six years. The corporation;is in a 40 percent tax bracket and has a 10 percent cost of capital.;Should the investment be undertaken? Use the net present value;method.;30. An asset was purchased three years ago for;$140,000. It falls into the five-year category for MACRS depreciation. The firm;is in a 35 percent tax bracket. Compute the;a. Tax loss on the sale and the related tax;benefit if the asset is sold now for $15,320.;b. Gain;and related tax on the sale if the asset is sold now for $58,820. (Refer to;footnote 3.);31. Polycom Technology is considering the;purchase of a new piece of equipment for;$110,000. It has a nine-year midpoint of its asset depreciation range (ADR). It;will require an additional initial investment of $60,000 in nondepreciable;working capital. Fifteen thousand dollars of this investment will be recovered;after the sixth year and will provide additional cash flow for that year.;Income before depreciation and taxes for the next;six years will be;Year Amount;1..................... $85,000;2..................... 75,000;3..................... 60,000;4..................... 52,500;5..................... 45,000;6..................... 40,000;The;tax rate is 30 percent. The cost of capital must be computed based on;the following (round the final value to;the nearest whole number);Cost (aftertax);Weights;Debt...........................................................;Kd;7.0%;40%;Preferred stock...........................................;Kp;10.0;10;Common equity (retained earnings)...........;Ke;16.0;50;a. Determine the annual depreciation;schedule.;b. Determine annual cash flow. Include;recovered working capital in the sixth year.;c. Determine the weighted average cost of;capital.;d. Determine the net present value. Should;Polycom Technology purchase the new equipment?;32. Graphic Systems purchased a computerized;measuring device two years ago for $80,000. It falls into the five-year;category for MACRS depreciation. The equipment can currently be sold for;$28,400.;A new piece of equipment will cost $210,000. It also falls into;the five-year category for MACRS depreciation.;Assume;the new equipment would provide the following stream of added cost savings for;the next six years.;Year;Cash Flow;1................;$76,000;2................;66,000;3................;62,000;4................;60,000;5................;56,000;6................;42,000;The;tax rate is 34 percent and the cost of capital is 12 percent.;a. What is the book value of the old;equipment?;b. What is the tax loss on the sale of the;old equipment?;c. What is the tax benefit from the sale?;d. What is the cash inflow from the sale of;the old equipment?;e. What is the net cost of the new equipment?;(Include the inflow from the sale of the old equipment.);f. Determine the depreciation schedule for;the new equipment.;g. Determine the depreciation schedule for;the remaining years of the old equipment.;h. Determine the incremental depreciation between;the old and new equipment and the related tax shield benefits.;i. Compute the aftertax benefits of the cost;savings.;j. Add the depreciation tax shield benefits;and the aftertax cost savings, and determine the present value. (See Table;12-17 as an example.);k. Compare the present value of the;incremental benefits (j) to the net;cost of the new equipment (e). Should;the replacement be undertaken?;COMPREHENSIVE PROBLEM;The Woodruff Corporation purchased a piece;of equipment three years ago for $230,000. It has an asset depreciation range;(ADR) midpoint of eight years. The old equipment can be sold for $90,000.;A;new piece of equipment can be purchased for $320,000. It also has an ADR of;eight years.;Assume the old and new equipment would provide the following;operating gains (or losses) over the next six years.;New Equipment;Old Equipment;1.............;$80,000;$25,000;2.............;76,000;16,000;3.............;70,000;9,000;4.............;60,000;8,000;5.............;50,000;6,000;6.............;45,000;(7,000);The;firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new;equipment be purchased to replace the old equipment?

 

Paper#45519 | Written in 18-Jul-2015

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