Vendome Company Is Considering the Purchase of the Following Computer

question 50

Multiple Choice

Vendome Company is considering the purchase of the following computer equipment, which is considered 5-year property for tax purposes: $\begin{array}{lr}\text { Acquisition cost } & \$ 500,000 \\\text { Annual cash flow } & \$ 180,000 \\\text { Annual operating costs } & \$ 30,000 \\\text { Expected salvage value } & \$ 0\\\text { Cost of capital } & 12 \% \\\text { Tax rate } & 40 \%\end{array}$ Vendome plans to use MACRS and keep the production equipment for seven years. (Round amounts to dollars.) The tax savings from depreciation in Year 3 would be

• A)$38,400.
• B)$28,570.
• C)$71,428.
• D)$96,000.

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Definitions:

Perfectly Competitive

Describes a market structure where all firms sell identical products, there are many buyers and sellers, and no single entity can influence the market price.

Industry Experience

Refers to the practical knowledge and insight gained through direct involvement and work within a specific industry.

Normal Returns

The minimum profit necessary for a company to remain competitive in the market, essentially covering opportunity costs.

Perfectly Elastic

Describes a situation in demand or supply where the quantity demanded or supplied changes infinitely in response to any change in price.