Unlow Inc Must Choose Between Two Alternate Transactions

question 72

Multiple Choice

Unlow Inc. must choose between two alternate transactions. Transaction 1 would generate $160,000 cash, all of which would be taxable, while transaction 2 would generate $120,000 cash, none of which would be taxable. Determine the marginal tax rate at which the after-tax cash flows from the two transactions are equal.

• A) 15%
• B) 20%
• C) 25%
• D) 30%

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Definitions:

Salvage Value

The estimated residual value of an asset at the end of its useful life, which can be recovered through disposal.

Depreciation Expense

The distribution of a physical asset's cost throughout its lifespan.

Double Declining-Balance Method

An accelerated depreciation method that uses up to twice the straight-line rate multiplied with the book value of asset to calculate depreciation expense. Residual value is not subtracted from the cost of an asset in this calculation.

Equipment Purchase

Equipment purchase involves acquiring physical assets, such as machinery or office equipment, that are used in the operations of a business.