The Manager of Big Mac Ltd Is Considering the Purchase

question 43

Multiple Choice

The manager of Big Mac Ltd is considering the purchase of equipment to make hamburgers that will reduce annual operating costs by $1500.The equipment will cost $6000 and will have a useful life of five years with no resale value.The new equipment will replace equipment purchased five years ago at a cost of $10 000,has a book value of $5000 and no resale value.What will be the net effect on profit for the next five years in total if the new equipment is purchased? (Ignore tax effects. )

• A) $7500 increase
• B) $4500 decrease
• C) $3500 decrease
• D) $1500 increase

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Definitions:

Business Loss

A financial state where business expenses exceed its revenue, which can affect tax liabilities.

Deduct

To subtract or take away from the gross amount; in taxation, to lower taxable income by subtracting allowable deductions.

At-risk Amount

The investment in money or other property at risk in an activity, determining the deductible loss limit.

Passive Loss Rules

Tax provisions limiting the amount of loss investors can claim from passive activities, such as rental properties, to offset other income.