The following is governed by an income tax rate of 25% . Depreciation rate is determined using MACRS A company is considering two alternatives Choice 1 : Amachine is purchased for 60,000. It is a 5 year property class. It will be used for 10 years after which it will have a salvage value of 15,000. It is mostly grey with a metallic steel cover. The Before Tax Cash Flow will be 80,000 per year. The machine is purchased from Retained Earning cash outright. It has no extra deductions associated with it. Choice 2: A machine is purchased for 65,000. It is a 10 year property class object. It will be used for 12 years with a salvage value of 18,000. It is mostly blue with a white cover. The Before Tax Cash Flow will be 86,000 per year. The machine is purchased from Retained Earnings Cash Outright. It receives an additional allowance for environmental effects of 5000/yr. The allowance is not taxed. and is not included in the 86,000 BTCF. Which of the following statements is true in the third year of operation? The depreciation of choice 2 exceeds the depreciation of choice 1 The income tax of choice 1 is 17120 (within 1/2%) The After Tax Cash Flow of choice 1 is 69,826 (within 1/2%) The Taxable Income of choice 2 is 70,136 (within 1/2% for possible roundoff error) The After Tax Cash Flow of choice 1 exceeds choice 2.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The following is governed by an income tax
rate of 25% . Depreciation rate is
determined using MACRS
A company is considering two alternatives
Choice 1 : Amachine is
purchased for 60,000. It is a 5 year property
class. It will be used for 10 years after which
it will have a salvage value of 15,000. It is
mostly grey with a metallic steel cover.
The Before Tax Cash Flow will be 80,000 per
year. The machine is purchased from
Retained Earning cash outright. It has no
extra deductions associated with it.
Choice 2: A machine is
purchased for 65,000. It is a 10 year
property class object. It will be used for
12 years with a salvage value of 18,000. It
is mostly blue with a white cover. The
Before Tax Cash Flow will be 86,000 per
year. The machine is purchased from
Retained Earnings Cash Outright. It
receives an additional allowance for
environmental effects of 5000/yr. The
allowance is not taxed. and is not included in
the 86,000 BTCF.

Which of the following statements is true in
the third year of operation?
The depreciation of choice 2 exceeds the
depreciation of choice 1
The income tax of choice 1 is 17120 (within
1/2%)
The After Tax Cash Flow of choice 1 is 69,826
(within 1/2%)
The Taxable Income of choice 2 is 70,136
(within 1/2% for possible roundoff error)
The After Tax Cash Flow of choice 1 exceeds
choice 2.

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For 60,000 dollars, a machine is purchased. It's a five-year property course. It will be used for ten years, following which it will be salvaged for $15,000 in worth. It has a metallic steel cover and is primarily grey. The annual Before-Tax Cash Flow will be $80,000. Retained Earnings cash is used to purchase the machine outright. There are no additional deductions attached to it. A machine is acquired for $65,000 dollars. It's an object of the property class with a 10-year lifespan. It will be utilised to its full potential. The automobile, which has a salvage value of $8,000, has been on the road for 12 years. The book is primarily blue, with a white cover. The Before-Tax Cash Flow will be $86,000 per year. Retained Earnings Cash was paid in full for the machine. It also receives a 5000-per-year environmental allowance. There is no taxation on the allowance. It is not included in the 86,000 BTCF.

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