2 While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear?there is no mortgage on it. Which of the following statements is CORRECT? Answer If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building. Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be refiected in the cash flows for any new project.

2 While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear?there is no mortgage on it. Which of the following statements is CORRECT? Answer If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building. Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be refiected in the cash flows for any new project.

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter18: Corporations: Organization And Capital Structure

Section: Chapter Questions

Problem 38P

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Rowell Company spent $3 million two years ago to build a plant for a new project. It then decided not to go forward with the project, so the building is available for sale or for other new projects. Rowell owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT? a. If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building. b. This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. d. If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as an opportunity cost to any new project that would use it.
Discussion Details Review the scenario below and answer the following questions: Western Bank & Trust purchased land and a building for the lump sum of $3 million dollars. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land. Explain the tax advantage of allocating too much to the building and too little to the land. • Was Western's allocation ethical? If so, state why. If not, state why not. Identify who was harmed.
Review the scenario below and answer the following questions: Western Bank & Trust purchased land and a building for the lump sum of $3 million dollars. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land. Explain the tax advantage of allocating too much to the building and too little to the land. Was Western's allocation ethical? If so, state why. If not, state why not. Identify who was harmed.
(d) If the old machine is sold for $5,000 now instead of $2,500, what would be the amount of the gains tax?(e) If the old machine had been depreciated by 175% DB and then by a switch to SL depreciation, what would be the current book value?(f) If the old machine were not replaced by the new one and has been depreciated by the 175% DB method, when would be the time to switch from DB to SL depreciation'?
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The firm founder purchases a construction crane to rent out. Only equity capital is used, no debt. The terms of the rental are such that the services of a crane operator are included in the lease of the equipment, in a manner similar to the Taxi analysis, wherein the taxi provides the vehicle, and driver. The firm is contemplating the following: Crane acquisition cost $ 1,000,000 Years of useful life (economic life) 5 Tax rate 0% Required rate of return on equity 10% Annual revenues $ 2,000,000 Operating expenses include only: “Other expenses” of $1,500,000, plus depreciation. what's the operating cash flow analysis? What's the economic profit analysis?