<u>Solution and Explanation:</u>
a.<u>Compute Firm A’s net cash flow attributable to the asset purchase in each year.Year 2011: </u>
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. </u>
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