Answered: Looner Industries is currently…

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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Question

Looner Industries is currently analyzing the purchase of a new machine that costs $158,000 and requires $19,900 in installation costs. Purchase of this machine is expected to result in an increase in net working capital of

$29,600 to support the expanded level of operations. The firm plans to depreciate the machine under MACRS using a five-year recovery period (see the table attached for the applicable depreciation percentages) and expects to sell the machine to net $10,300 before taxes at the end of its usable life. The firm is subject to a 21% tax rate

c. Assuming a five-year usable life, calculate the terminal cash flow if the machine were sold to net (1) $8,895 or (2) $169,900 (before taxes) at the end of five years.

d. Discuss the effect of sale price on terminal cash flow using your findings in part c.

**Data Table: Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes**

| Recovery Year | 3 Years | 5 Years | 7 Years | 10 Years |
|---------------|---------|---------|---------|----------|
| 1 | 33% | 20% | 14% | 10% |
| 2 | 45% | 32% | 25% | 18% |
| 3 | 15% | 19% | 18% | 14% |
| 4 | 7% | 12% | 12% | 12% |
| 5 | | 12% | 9% | 9% |
| 6 | | 5% | 9% | 8% |
| 7 | | | 9% | 7% |
| 8 | | | 9% | 6% |
| 9 | | | | 6% |
| 10 | | | | 6% |
| 11 | | | | 4% |
| **Totals** | 100% | 100% | 100% | 100% |

*Note: These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.*

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