The Ajax Corporation purchased a railroad tank car 8 years ago for $60,000. It is being depreciated


The Ajax Corporation purchased a railroad tank car 8 years ago for $60,000. It is being depreciated by SOYD depreciation, assuming a 10-year depreciable life and a $7000 salvage value. The tank car needs to be reconditioned now at a cost of $35,000. If this is done, it is estimated the equipment will last for 1° more years and have a $10,000 salvage value at the end of the 1° years. On the other hand, the existing tank car could be sold now for $10,000 and a new tank car purchased for $85,000. The new tank car would be depreciated by MACRS depreciation. Its estimated actual salvage value would be $15,000. In addition, the new tank car would save $7000 per year in maintenance costs, compared to the reconditioned tank car. Based on a 15% before-tax rate of return, determine whether the existing tank car should be reconditioned or a new one purchased. (Note: The problem statement provides more data than are needed, which is typical of real situations.)

Depreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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