Use the Following Information for Questions 9-A and 9-B: Dowen

question 27

Essay

Use the following information for questions 9-A and 9-B: Dowen Corp. purchased a piece of equipment two years ago for $40,000. It has been depreciated straight line over a five- year life with an expected salvage value of $10,000. Dowen is considering replacing this equipment with a machine that would cost $80,000 and would be depreciated on a straight line basis over 10 years with a projected salvage value of zero. The old piece of equipment can be sold today for $22,000. The applicable tax rate is 40%.
A. What is the initial outlay for this project?
a. $55,600
b. $58,000
c. $60,400
d. $72,000
e. $80,000
B. What is the change in depreciation in Year 3 of the new machine's life?
a. $2,000 increase
b. $2,000 decrease
c. $6,000 increase
d. $8,000 increase
e. $8,000 decrease

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Definitions:

Stock Prices

The cost of purchasing a share of equity in a company, which fluctuates based on market conditions.

Shares Outstanding

The total number of a company's shares that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

2-for-1 Split

A stock split in which a company divides its existing stock into two shares, effectively halving the price of each share while doubling the number of shares owned by shareholders.

5-for-3 Split

A type of stock split where shareholders receive 5 shares for every 3 shares they hold, effectively increasing the share quantity and adjusting the stock price downward.