The Dawn Co. is considering the purchase of new machines in order to expand their business. The machines have a useful life of five years. The required rate of return for the expansion is 17%. The company's tax rate is 40%.

-a. What is the cash outflow at t = 0?
b. What are the deprecation deductions for financial reporting purposes if machines are to be depreciated over 8 years using straight line depreciation?
c. What is the book value of the machines at the end of year five?
d. What is the taxable gain/loss from the sale of the machines at the end of the useful life if they are sold for the estimated salvage value?
e. What is the tax on the sale of the machines at the end of year five ?

Question

The Dawn Co. is considering the purchase of new machines in order to expand their business. The machines have a useful life of five years. The required rate of return for the expansion is 17%. The company's tax rate is 40%.
 
-a. What is the cash outflow at t = 0?
b. What are the deprecation deductions for financial reporting purposes if machines are to be depreciated over 8 years using straight line depreciation?
c. What is the book value of the machines at the end of year five?
d. What is the taxable gain/loss from the sale of the machines at the end of the useful life if they are sold for the estimated salvage value?
e. What is the tax on the sale of the machines at the end of year five ?

Quizplus · Accepted Answer

The Answer of The Dawn Co. is considering the purchase of new machines in order to expand their business. The machines have a useful life of five years. The required rate of return for the expansion is 17%. The company's tax rate is 40%.
 
-a. What is the cash outflow at t = 0?
b. What are the deprecation deductions for financial reporting purposes if machines are to be depreciated over 8 years using straight line depreciation?
c. What is the book value of the machines at the end of year five?
d. What is the taxable gain/loss from the sale of the machines at the end of the useful life if they are sold for the estimated salvage value?
e. What is the tax on the sale of the machines at the end of year five ?