Local Construction Company Is Considering the Purchase of a Bulldozer

question 16

Essay

Local Construction Company is considering the purchase of a bulldozer for $280,000. The expected life is four years. The company is comparing the depreciation tax shield using MACRS versus the straight-line method. If MACRS is used, the MACRS life is three years with a depreciation rate of 200 percent annually. Regardless of the method of depreciation used, the mid-year convention will be observed. The company's tax rate is 40 percent. The straight-line method assumes mid-year convention, and the cost of capital is 14 percent.
Required: (Round all calculations to the nearest dollar.)
a. Calculate the tax savings from depreciation for each year using both the MACRS and straight- line methods.
b. Calculate the present value of the tax savings for both depreciation methods.
c. Which method should be used to minimize the firm's tax liability? Why?

Understand the theory and rationale behind the LCM rule, including conservatism.

Apply the gross profit method to estimate inventory cost.

Recognize specific accounting treatments for loss on non-cancellable purchase contracts.

Understand and apply the concept of the lower of cost or market rule in inventory valuation.

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Definitions:

Market Efficiency

A concept where prices in a market fully reflect all available information, leading to an optimal distribution of resources.

Demand Schedule

A demand schedule is a table that shows the quantity of a good or service that consumers are willing and able to purchase at various prices.

Marginal Cost

The cost of producing one additional unit of a good or service.

Markup

The gap between the purchase expense of a good or service and the price at which it's sold, represented as a percentage of the buying price.