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Questions and Answers of Economics

In Problem 10-24, how much is it worth to the firm to be able to extend the product’s life by 3 Years, at a cost of $50,000, at the end of the product’s initial useful life?
Al took a midterm examination in physics and received a score of 65. The mean was 60 and the standard deviation was 20. Bill received a score of 14 in mathematics, where the exam mean was 12 and the
The Graham Telephone Company may invest in new switching equipment. There are three possible outcomes, having net present worth of $6570, $8590, and $9730. The probability of each outcome is 0.3,
A new machine will cost $25,000. The machine is expected to last 4 years and has no salvage value. If the interest rate is 12%, determine the return and the risk associated with the purchase.
What is your risk associated with Problem 10-14?
Measure the risk for Problem 10-19 using the P(loss), range of PW values, and standard deviation of the PWs.
(a) In Problem 10-24, describe the risk using the P (1oss) and standard deviation of the PWs. .(b) How much do the answers change if the possible life extension in Problem 10-25 is allowed?
An engineer decided to make a careful analysis of the cost of fire insurance for his $200,000 home. From a fire rating bureau he found the following risk of fire loss in any year.Outcome
A firm wants to select one new research and development project. The following table summarizes six possibilities. Considering expected return and risk, which projects are good candidates? The firm
A firm is choosing a new product. The following table summarizes six new potential products. Considering expected return and risk, which products are good candidates? The firm believes it can earn
A depreciable asset costs $10,000 and has an estimated salvage value of $1600 at the end of its 6-year depreciable life. Compute the depreciation schedule for this asset by both SOYD depreciation and
A million-dollar oil drilling rig has a 6-year depreciable life and a $75,000 salvage value at the end of that time. Determine which one of the following methods provides the preferred depreciation
A new machine tool is being purchased for $16,000 and is expected to have a zero salvage value at the end of its 5-year useful life. Compute the DDB depreciation schedule for this capital asset.
Some special handling devices can be obtained for $12,000. At the end of 4 years, they can be sold for $600. Compute the depreciation schedule for the devices using the following methods:(a)
The company treasurer is uncertain which of four depreciation methods the firm should use for office furniture that costs $50,000, and has a zero salvage value at the end of a 10-year-depreciable
The RX Drug Company has just purchased a capsulation machine for $76,000. The plant engineer estimates the machine has a useful life of 5 years and little or no salvage value. He will use zero
The Acme Chemical Company purchased $45,000 of research equipment, which it believes will have zero salvage value at the end of its 5-year life. Compute the depreciation schedule for the equipment by
Consider a $6500 piece of machinery, with a 5-year depreciable life and an estimated $1200 salvage value. The projected utilization of the machinery when it was purchased, and its actual production
A large profitable corporation purchased a small jet plane for use by the firm's executives in January. The plane cost $1.5 million and, for depreciation purposes, is assumed to have a zero salvage
For an asset that fits into the MACRS "All property not assigned to another class" designation, show in a table the depreciation and book value over the asset's l0-year life of use. The cost basis of
A company that manufactures food and beverages in the vending industry has purchased some handling equipment that cost $75,000 and will be depreciated using MACRS GDS. The class life of the asset is
Consider five depreciation schedules:They are based on the same initial cost, useful life, and salvage value. Identify each schedule as one of the following Straight-line depreciation. .Sum-of-years'
The depreciation schedule for an asset, with a salvage value of $90 at the end of the recovery period, has been computed by several methods. Identify the depreciation method used for each
The depreciation schedule for a microcomputer has been arrived at by several methods. The estimated salvage value of the equipment at the end of its 6-year useful life is $600. Identify the resulting
TELCO Corp has leased some industrial land near its plant. It is building a small warehouse on the site at a cost of $250,000. The building will be ready for use January 1. The lease will expire 15
A profitable company making earthmoving equipment is considering an investment of $100,000 on equipment that will have 5-year useful life and a $20,000 salvage value. If money is worth 10%, which one
The White Swan Talc Company purchased $120,000 of mining equipment for a small talc mine. The mining engineer's report indicates the mine contains 40,000 cubic meters of commercial quality talc. The
For its fabricated metal products, the Able Corp. is buying $10,000 of special tools that have a 4-year useful life and no salvage value. Compute the depreciation charge for the second year by each
Use MACRS GDS depreciation for each of the assets, 1-3, to calculate the following items, (a)-(c).1. A light general-purpose truck used by a delivery business, cost = $17,000.?2. Production equipment
On July 1 Nancy Regan paid $600,000 for commercial building and an additional $150,000 for the land on which it stands. Four years later, also on July 1, s be sold the property for $850,000. Compute
A group of investors has formed Trump Corporation to purchase a small hotel. The asking price is $150,000 for the land and $850,000 for the hotel building if the purchase takes place in June, compute
A company is considering buying a new piece of machinery. A 10% interest rate will be used in the computations. Two models of the machine are available.(a) Determine which machine should be
Equipment costing $20,000 that is a MACRS 3-year property is disposed of during the second year for $14,000. Calculate any depreciation recapture, ordinary losses, or capital gains associated with
An asset with a 8-year ADR class life costs $50,000 and was purchased on January I, 2001. Calculate any depreciation recapture, ordinary losses, or capital gains associated with selling the equipment
When a major highway was to be constructed nearby, a farmer realized that a dry streambed running through his property might a valuable source of sand and gravel. He shipped samples to a testing
Mr. H. Salt purchased a 1/8 interest in a producing oil well for $45,000. Recoverable oil reserves for the well were estimated at that time at 15,000 barrels 1/8 of which represented Mr. Salt's share
A heavy construction firm has been awarded a contract to build a large concrete dam. It is expected that a total of 8 years will be required to complete the work. The firm will buy $600,000 worth of
Some equipment costs $1000, has a 5-year depreciable life, and an estimated $50 salvage value at the end of that time. You have been assigned the problem to determine whether to use straight-line or
The FOURX Corp has purchased $12,000 of experimental equipment. The anticipated salvage value is ~ $400 at the end of its 5-year depreciable life. This profitable corporation is considering two
Office equipment whose initial cost is $100,000 has an estimated actual life of 6 years, with an estimated salvage value of $10,000. Prepare tables listing the annual costs of depreciation and the
You are equipping an office. The total office equipment will have a first cost of $1, 75,000 and a salvage value of $200,000. You expect the equipment will last 10 years. Use a spreadsheet function
These can be solved by hand, but most will be solved much more easily with a spreadsheet An unmarried taxpayer with no dependents expects an adjusted gross income of $48,000 in a given year. His
John Adams has a $50,000 adjusted gross income from Apple Corp. and allowable itemized deductions of $5000. Mary Eve has a $45,000 adjusted gross in come and $2000 of allowable itemized deductions.
Bill Jackson worked during school and during the first 2 months of pis summer vacation. After factoring in his deductions and personal exemption as a single man, Bill found that he had a total
A married couple filing jointly has a combined total adjusted gross income of $75,000. They have computed that their allowable itemized deductions are $4000. Compute their federal income tax.
Jane Shay operates a management consulting business. The business has been successful and now produces a taxable income of $65,000 per year after all "ordinary and necessary" expenses and
Bill Alexander and his wife Valerie are both employed. Bill will have an adjusted gross income this year of $70,000. Valerie has an adjusted gross income of $2000 a month. Bill and Valerie have
A company wants to set up a new office in a country where the corporate tax rate is as follows: 15% of first $50,000 profits, 25% of next $25,000, 34% of next $25,000, and 39% of everything over
ARKO oil company purchased two large compressors for $125,000 each. One compressor was installed in the firm's Texas refinery and is being depreciated by MACRS depreciation. The other compressor was
Sole Brother Inc. is a shoe outlet to a major shoe manufacturing industry located in Chicago. Sole Brother Uses accounts payable as one of its financing sources. Shoes are delivered to Sole Brother
To increase its market share, Sole Brother Inc. decided to borrow $5000 from its banker for the purchase of newspaper advertising for its shoe retail line. The loan is to be paid in four equal annual
A major industrialized state has a state corporate tax rate of 9.6% of taxable income. If a corporation has a state taxable income of $150,000, what is the total state and federal income tax it must
An unmarried individual in California with a taxable income of about $80,000 has a federal incremental tax rate of 30% and a state incremental tax rate of 9.3%. What is his combined incremental tax
The Lynch Bull investment company suggests that Steven Comstock, a wealthy New York City investor (his incremental income tax rate is 38.6%), consider the following investment. Buy corporate bonds on
Albert Chan decided to buy an old duplex as an investment. After looking for several months, he found a desirable duplex that could be bought for $93,000 cash. He decided that he would rent both
Zeon, a large, profitable corporation, is considering adding some automatic equipment to its production facilities. An investment of $120,000 will produce an initial annual benefit of $29,000, but
A group of businessmen formed a corporation to lease for 5 years a piece of land at the intersection of two busy streets. The corporation has invested $50,000 in car-washing equipment. They will
The effective combined tax rate in an owner-managed corporation is 40%. An outlay of $20,000 for certain new assets is under consideration. It is estimated that for the next 8 years, these assets
A firm is considering the following investment project:The project has a 5-year useful life with a $125,000 salvage value, as shown. Double declining balance depreciation will be used, assuming the
The Shell out Corp. owns a piece of petroleum drilling equipment that costs $100,000 and will be depreciated in 10 years by double declining balance depreciation, with conversion to straight-line
A mining corporation purchased $120,000 of production machinery and depreciated it using SOYD depreciation, a 5-year depreciable life, and zero salvage value. The corporation is a profitable one that
An automobile manufacturer is buying some special tools for $100,000. The tools are being’ depreciated' by double declining balance depreciation using a 4- year depreciable life and a $6250 salvage
This is the continuation of Problem 12-21. Instead of paying $100,000 cash for the tools, the corporation will pay $20,000 now and borrow the remaining $80,000. The depreciation schedule will remain
A project will require the investment of $108,000 in equipment (sum-of-years' -digits depreciation with a depreciable life of 8 years and zero salvage value) and $25,000 in raw materials (not
A profitable incorporated business is considering an investment in equipment having the following before tax cash flow. The equipment will be depreciated by double declining balance depreciation with
A salad oil bottling plant can either purchase caps for the glass bottles at 5 cents each or install $500,000 worth of plastic molding equipment and manufacture the caps at the plant. The
A firm has invested $14,000 in machinery with a 7- year useful life. The machinery will have no salvage value, as the cost to remove it will equal its scrap value. The uniform annual benefits from
A firm manufactures padded shipping bags. One hundred bags are packed in a cardboard carton. At present, machine operators fill the cardboard cartons by eye: that is, when the cardboard carton looks
Mr. Sam K. Jones, a successful businessman, is considering erecting a small building on a commercial lot he owns very close to the center of town. A local furniture company is willing to lease the
One January Gerald Adair bought a small house and lot for $99,700. He estimated that $9700 of this amount represented the value of the land. He rented the house for $6500 a year during the 4 years he
A corporation with a 34% income tax rate is considering the following investment in research equipment and has projected the benefits as follows
An engineer is working on the layout of a new research and experimentation facility. Two plant operators will be required. If, however, an. Additional $100,000 of instrumentation and remote controls
A special power tool for plastic products costs $400, has a 4-year useful life, no salvage value, and a 2-year before-tax payback period. Assume uniform annual end-of-year benefits.(a) Compute the
The Ogi Corporation, a construction company, purchased a pickup truck for $14,000 and used MACRS depreciation in the income tax return. During the time the company had the truck, they estimated that
A profitable wood products corporation is considering buying a parcel of land for $50,000, building a small factory building at a cost of $200,000, and equipping it with $150,000 of MACRS 5-year
A small vessel was purchased by a chemical company for $55,000 and is to be depreciated by MACRS depreciation. When its requirements changed suddenly, the chemical company leased the vessel to an oil
Xon, a small oil company, purchased a new petroleum drilling rig for $1,800,000. Xon will depreciate the drilling rig using MACRS depreciation. The drilling rig has been leased to a drilling company,
The profitable Palmer Golf Cart Corp. is considering investing $300,000 in special tools for some of the plastic golf cart components. Executives of the company believe the present golf cart model
Uncle Elmo is contemplating a $10,000 investment in a methane gas generator. He estimates his gross income would be $2000 the first year and increase by $200 each year over the next 10years. His
Granny's Butter and Egg Business is such that she pays an effective tax rate of 40%. Granny is considering the purchase of a new Throb Churn for $25,000. This churn is a special handling device for
Eric Heiden has a house and lot for sale for $70,000. It is estimated that $10,000 is the value of the land and $60,000 is the value of the house. Bonnie Blair is purchasing the house on January 1 to
Bill Cavitt owns a data processing company. He plans to buy an additional computer for $20,000, use the computer for 3 years, and sell it for $10,000. He expects that use of the computer will produce
Refer to Problem 12-33. To help pay for the pickup truck the Ogi Corp. obtained a $10,000 loan from the truck dealer, payable in four end-of-year payments of $2500 plus 10% interest on the loan
The management of a private hospital is considering the installation of an automatic telephone switchboard, which would replace a manual switchboard and eliminate the attendant operator's position.
A contractor has to choose one of the following alternatives in performing earth-moving contracts:(a) Purchase a heavy-duty truck for $13,000. Salvage value is expected to be $3000 at the end of the
The Able Corporations considering the installation of a small electronic testing device for use in conjunction with a government contract the firm has just won. The testing device will cost $20,000,
A house and lot are for sale for $155,000. It is estimated that $45,000 is the value of the land and $110,000 is the value of the house. If purchased, the house can be rented to provide a net income
A corporation is considering buying a medium-sized computer that will eliminate a task that must be performed three shifts per day, 7 days per week, except for one 8-hour shift per week when the
A sales engineer has the following alternatives .to consider in touring his sales territory.(a) Buy a new car for $14,500. Salvage value is expected to be about $5000 after 3 years. Maintenance and
A large profitable company, in the 40% federal/state tax bracket, is considering the purchase of a new piece of equipment. The new equipment will yield benefits of $10,000 in Year 1, $15,000 in Year
A prosperous businessman is considering two alternative investments in bonds. In both cases the first interest payment would be received at the end of the first year. If his personal taxable income
A small-business corporation is considering whether to replace some equipment in the plant. An analysis indicates there are five alternatives in addition to the do-nothing option, Alt. A. The
A corporation with $7 million in annual taxable income is considering two alternatives:Before-Tax Cash FlowYear Alt. 1
Two mutually exclusive alternatives are being considered by a profitable corporation with an annual taxable income between $5 million and $10 million. Before-Tax Cash FlowYear
A large profitable corporation is considering two mutually exclusive capital investments:
A store owner, Joe Lang, believes his business has suffered from the lack of adequate customer parking space. Thus, when he was offered an opportunity to buy an old building and lot next to his
Typically there are two alternatives in a replacement analysis. One alternative is to replace the defender now. The other alternative is which one of the following?(a) Keep the defender for its
The economic life of the defender can be obtained if certain estimates about the defender can be made. Assuming those estimates prove to be exactly correct, one can accurately predict the year when
A machine tool, which has been used in a plant for 10 years, is being considered for replacement. It cost $9500 and was depreciated by MACRS depreciation using a 5-year recovery period. An equipment
A new$40,000bottlingmachinehasjust been installed in a plant. It will have no salvage value when it is removed. The plant manager has asked you to estimate the economic service life for the machine,

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