Table 11.3 Cuda Marine Engines, Inc. Must Develop the Relevant Cash Flows

question 55

Multiple Choice

Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
-The tax effect on the sale of the existing asset results in ________. (See Table 11.3)

• A) $800 tax benefit
• B) $1,000 tax liability
• C) $1,100 tax liability
• D) $6,000 tax liability

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Definitions:

Amortized

The process of paying off a debt over time in regular installments of interest and principal sufficient to repay the loan in full by its maturity date.

Compounded Semi-annually

A technique used to compute interest in which the interest is compounded semi-annually by being added to the principal sum two times within the year.

Compounded Quarterly

The process where interest on an investment is calculated and added to the principal every three months, contributing to the growth of the investment amount.

Compounded Monthly

Entails the regular addition of interest to the principal balance of a loan or deposit every month, affecting overall returns or costs.