Replacement of a machine, income taxes, sensitivity. (CMA, adapted) The Kuhl Brothers own a frozen custard ice cream shop. The brothers currently are using a machine that has been in use for the last 4 years. On January 1, 2017, the Kuhl Brothers are considering buying a new machine to make their frozen custard. The Kuhl Brothers have two options: (1) continue using the old freezing machine or (2) sell the old machine and purchase a new freezing machine. The seller of the new machine is not interested in a trade-in of Kuhl’s old machine. The following information has been obtained:
The Kuhl Brothers are subject to a 25% income tax rate. Any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by the Kuhl Brothers in the year in which it occurs. The Kuhl Brothers have an after-tax required
- 1. The Kuhl Brothers ask you whether they should buy the new machine. To help in your analysis, calculate the following:
Required
- a. One-time after-tax cash effect of disposing of the old machine on January 1, 2017
- b. Annual recurring after-tax cash operating savings from using the new machine (variable and fixed)
- c. Cash tax savings due to differences in annual
depreciation of the old machine and the new machine - d. Difference in after-tax cash flow from terminal disposal of new machine and old machine
- 2. Use your calculations in requirement 1 and the
net present value method to determine whether the Kuhl Brothers should continue to use the old machine or acquire the new machine. - 3. How much more or less would the recurring after-tax cash operating savings of the new machine need to be for the Kuhl Brothers to earn exactly the 8% after-tax required rate of return? Assume that all other data about the investment do not change.
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Chapter 21 Solutions
COST ACCOUNTING
- 2. Warren owns a marketing business. He travels to Maryland in May 2020 to discuss acquiring an accounting business. In June Warren travels to Georgia to discuss acquiring a pizza shop. Warren does not acquire the accounting business but does purchase the pizza shop on December 2, 2020. Total costs to investigate acquiring the accounting business $25,000. Total costs to investigate acquiring the pizza shop $52,000. What is the maximum amount Warren can deduct in 2020 for investigating these businesses? How will he show this on his tax return? Calculate the deduction that Warren can take on his tax return for 202o.arrow_forwardAngus and his sister Oona operate a small charter flight service that takes tourists on sightseeing tours over the beautiful Margaree River on Cape Breton Island. At the end of 2009, they had one four-seater plane in the aircraft asset class with a UCC of $30 000. In 2010, they purchased a second plane for $50 000. Business was going well in 2011, so they sold the old plane they had in 2009 for $15 000 and bought a newer version for $64 000. What was the UCC balance in the aircraft asset class at the end of 2012? The CCA rate for aircraft is 25 percent.arrow_forwardColin McGregor and his wife Alice own a house in Kelowna as well as a condo at Big White. They purchased the house in Kelowna in 1997 for $270,000 and the condo in 2012 for $190,000. Both properties have been used exclusively by the McGregors. Early in 2021 the McGregors retired and put both properties up for sale. The condo sold in April for $420,000 and the house sold in July for $750,000. Determine the minimum capital gain that must be reported on the sale of the two properties.arrow_forward
- Phil Dunphy, a real estate agent, is considering whether he should list an unusual $755,485 house for sale. If he lists it, he will need to spend $5,573 in advertising, staging, and fresh cookies. The current owner has given Phil 6 months to sell the house. If he sells it, he will receive a commission of $20,636. If he is unable to sell the house, he will lose the listing and his expenses. Phil estimates the probability of selling this house in 6 months to be 71%. What is the expected profit on this listing? Your Answer:arrow_forwardDaniel Jackson bought a home in 2010, before he married his wife Sarah. In 2020, Daniel and Sarah are equired to move due to Sarah’s new position she was offered recently. Daniel bought the home for 250,000 and it is being sold for 700,000 (it has had some upgrades). Daniel is self-employed so this won’tbe a problem for him. Sarah and Daniel were married 8 years ago. During his ownership, Daniel had a home office, where he worked form time to time.As a part of the sale, these are the required known attributes:• Sales Contract Price: 700,000• Expenses of the sale: 57,000• Purchase price: 250,000• Accumulated Depreciation for Home Office: $75001. Will they qualify for any gain exclusions? If so, explain why. If not, explain whyarrow_forwardPhil Dunphy, a real estate agent, is considering whether he should list an unusual $902,958 house for sale. If he lists it, he will need to spend $3,668 in advertising, staging, and fresh cookies. The current owner has given Phil 6 months to sell the house. If he sells it, he will receive a commission of $21,270. If he is unable to sell the house, he will lose the listing and his expenses. Phil estimates the probability of selling this house in 6 months to be 44%. What is the expected profit on this listing?arrow_forward
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