Question

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 $302,000. a. What is the book value of the​ equipment? b. If Jones sells the equipment today for $184,000 and its tax rate is 35%​, 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.

Answer 1

Answer:

a. What is the book value of the​ equipment?

• $86,976

b. If Jones sells the equipment today for $184,000 and its tax rate is 35%​, what is the​ after-tax cash flow from selling​ it?

• ($184,000 - $86,976) x (1 - 35%) = $97,024 x 65% = $63,065.60

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?

• the cost to taking the new order is the opportunity cost of selling the equipment, which is $63,065.60.

Explanation:

MACRS depreciation rate:

Year             %              Depreciation expense             Carrying value

1                   20%            $60,400                                  $241,600

2                  32%            $96,640                                  $144,960

3                  19.20%        $57,984                                  $86,976

4                  11.52%         $34,790.40                             $52,185.60

5                  11.52%         $34,790.40                             $17,395.20

6                  5.76%          $17,395.20                              $0