Additional End of Year Operating Revenue Additlonal Operating Expenses, Allowed Tax Excluding Depreclation Depreciation 1 $66,000 $29,000 $10,800 $70,000 $28,400 $17,280 3 $74,000 $32,000 $10,368 4 $80,000 $38,800 $6,221 5 $64,000 $31,000 $6,221 6 $50,000 $25,000 $3,110
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Tucson Solar Company builds residential solar homes. Because of an anticipated increase in business volume, the company is considering the acquisition of a loader at a cost of $54,000. This acquisition cost includes delivery charges and applicable taxes. The firm has estimated that if the loader is acquired, the following additional revenues and operating expenses (excluding
The projected revenue is assumed to be in cash in the year indicated, and all the additional operating expenses are expected to be paid in the year in which they are incurred. The estimated salvage value for the loader at the end of the sixth year is $8,000. The firm's incremental (marginal) tax rate is 35%.
(a) What is the after-tax cash flow if the loader is acquired?
(b) What is the equivalent annual cash flow the firm can expect by owning and operating this loader at an interest rate of 12%?
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