<u>**Solution and Explanation:**</u>

**a.**<u>Compute Firm A’s net cash flow attributable to the asset purchase in each year.Year 2011:
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Cost of Asset = ($50,000)

Tax Savings (Annual Depreciation x Tax Rate) = $1,099

Net Cash Flow = ($48,901)

Year 2012:

Cost of Asset = N/A

Tax Savings (Annual Depreciation x Tax Rate) () = $2,520

Net Cash Flow = $2,520

**b**. <u>Compute Firm A’s adjusted basis in the asset at the end of each year.
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INITIAL COST OF ASSET = $50000

DEPRECIATION YEAR 1 = (3140)

ADJUSTED BASIS AT END OF YEAR 1 = $46860

YEAR 2 DEPRECIATION = (7200)

ADJUSTED BASIS AT END OF YEAR 2 = $39660