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# Lecture 31 - Business Finance(ACC501 Lesson 31 Review of...

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161 Business Finance (ACC501) Lesson 31 Review of the Previous Lecture Pro Forma Financial Statements (Cont.) Tax Shield Approach A Closer Look on Net Working Capital Depreciation Topics Under Discussion Depreciation (Cont.) Capital Investment Decisions: A Comprehensive Problem Depreciation Depreciation for an automobile costing \$12,000 Year MACRS Percentage Depreciation 1 20.00% \$2,400.00 2 32.00 3,840.00 3 19.20 2,304.00 4 11.52 1,382.40 5 11.52 1,382.40 6 5.76 691.20 100.00% \$12,000.00 • Book Value versus Market Value Year Beginning Book Value Depreciation Ending Book Value 1 \$12,000.00 \$2,400.00 \$9,600.00 2 9,600.00 3,840.00 5,760.00 3 5,760.00 2,304.00 3,456.00 4 3,456.00 1,382.40 2,073.60 5 2,073.60 1,382.40 691.20 6 691.20 691.20 0.00 Suppose we want to sell the car after 5 years. Based on historical averages, it will be worth, say 25% of the purchase price, i.e. 0.25 x 12,000 = \$3,000 If sold on this price we would have to pay taxes on the difference between the price of \$3,000 and the book value of \$691.20.

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162 so the tax liability would be 0.34 x \$2,308.80 = \$784.99 The reason for tax payment is that the difference between the market and book value is the excess depreciation that must be recaptured when the asset is sold.
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Lecture 31 - Business Finance(ACC501 Lesson 31 Review of...

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