<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
  = $1,099
Net Cash Flow  = ($48,901)
Year 2012:
Cost of Asset   = N/A
Tax Savings (Annual Depreciation x Tax Rate) ( )  = $2,520
)  = $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