Tabletop Ranches Inc

question 43

Essay

Tabletop Ranches Inc. is considering the purchase of a new helicopter for $400,000. The firm's old helicopter has a book value of $90,000, but can only be sold for $60,000. It was being depreciated at the rate of $13,500 per year for four more years under an old depreciation method.
The new helicopter will be depreciated using the 5-year MACRS schedule. It is expected to save $75,000 after taxes through reduced fuel and maintenance expenses. Tabletop Ranch is in the 34% tax bracket and has a 12% cost of capital. Assume a six-year time horizon.
a) Calculate the cash inflows from selling the old helicopter.
b) Calculate the net cost of the new helicopter.
c) Calculate the incremental depreciation for the new helicopter.
d) Calculate the net cash flows for the purchase.
e) Calculate the net present value of the helicopter purchase and state whether or not the firm should buy it.

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Definitions:

Fraudulent Misrepresentation

An intentional false statement of a material fact made by one party to induce another party to enter into a contract.

Duress

Any unlawful act or threat exercised on a person whereby the person is forced to enter into an agreement or to perform some other act against his or her will.

Negligent Misrepresentation

A false statement made carelessly that is relied upon by others, leading to their financial loss.

Annullment

A legal procedure that declares a marriage null and void, as if it never legally existed, due to various possible reasons such as fraud or incapacity.