Matt Helm Corporation Is Considering the Purchase of an Asset

question 125

Multiple Choice

Matt Helm Corporation is considering the purchase of an asset for $400,000. It is expected that the product manufactured by the equipment can be sold for $150,000 and that there will be annual production costs, exclusive of depreciation, equal to $80,000. The asset will have a 10- year life, no terminal salvage value, and straight- line depreciation will be used for tax purposes. The tax rate applicable to Matt Helm Corporation is 30%. If the equipment is purchased, the total net after- tax effect on cash flows over the entire life of the investment is:

• A) $210,000 outflow
• B) $90,000 inflow
• C) $610,000 inflow
• D) $210,000 inflow

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Definitions:

Residual Value

The anticipated amount that an asset is expected to generate when it is sold at the conclusion of its useful lifespan.

Intangible Asset

An asset that is not physical in nature, such as patents, trademarks, and copyrights, having value due to its potential to generate economic benefits.

Natural Resource

Assets derived from the earth, such as minerals, forests, and water, which are used to produce goods and services.

Depletion Expense

The allocation of the cost of natural resources over their useful life, representing the exhaustion of mineral, oil, or gas deposits.