The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $301,000. a. What is the book value of the equipment? b. If Jones sells the equipment today for $180,000 and its tax rate is 21%, what is the after-tax cash flow from selling it? c. Just before it is about to sell the equipment, Jones receives a new order. I can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume the remainder of the machine's useful life.) Note Assume that the equipment is put into use in year 1.
The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $301,000. a. What is the book value of the equipment? b. If Jones sells the equipment today for $180,000 and its tax rate is 21%, what is the after-tax cash flow from selling it? c. Just before it is about to sell the equipment, Jones receives a new order. I can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume the remainder of the machine's useful life.) Note Assume that the equipment is put into use in year 1.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment
it originally purchased for $301,000.
a. What is the book value of the equipment?
b. If Jones sells the equipment today for $180,000 and its tax rate is 21%, what is the after-tax cash flow from selling
it?
c. Just before it is about to sell the equipment, Jones receives a new order. It can take the new order if it keeps the
old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume
the remainder of the machine's useful life.)
Note Assume that the equipment is put into use in year 1.
GOED
a. What is the book value of the equipment?
The book value of the equipment after the third year is $
(Round to the nearest dollar.)
b. If Jones sells the equipment today for $180,000 and its tax rate is 21%, what is the after-tax cash flow from selling
it?
The total after-tax proceeds from the sale are $
(Round to the nearest dollar.)
c. Just before it is about to sell the equipment, Jones receives a new order. It can take the new order if it keeps the
old equipment. Is there a cost to taking the order and if so, what is it? Explain. (Assume the new order will consume
the remainder of the machine's useful life.) (Select the best choice below)
OA. Yes, the cost of taking the order is the extra depreciation on the machine.
O B. No, Jones already owns the machine, so there is no cost to using it for the order.
OC. Yes, the cost of taking the order is the lost after-tax cash flow of $160,404 from selling the machine.
OD. Yes, the cost of taking the order is the lost $86,688 in book value.
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