copyright © 2005 John Wiley & Sons, Inc.
Case 9-2 Purchase of Assets
On October 10, 2005, Mason Engineering Company completed negotiations
on a contract for the purchase of new equipment. Under the terms of the
agreement, the equipment may be purchased now or Mason may wait until
January 10, 2006, to make the purchase. The cost of the equipment is
$400,000. It will be financed by a note bearing interest at the market rate of
interest. Straight-line depreciation over a ten-year life will be used for book
purposes. A double-declining balance over seven years will be used for tax
purposes. (One-half year’s depreciation will be taken in the year of purchase
regardless of the date of purchase.)
a. Discuss the financial statement impacts of postponing the purchase of
the equipment. Would the market price of the firm’s common stock be
affected by any or all of these impacts? Do not assume in your discussion
that the postponement will affect revenues or any operating costs,
other than depreciation.
b. Discuss any cash flow impacts related to postponing the purchase of
c. Efficient markets assume that stockholder wealth is affected by the
amount and timing of cash flows. Which alternative is more favorable
to them: purchasing before year-end or waiting until January? Explain
Recently Asked Questions
- Which of the following was not mentioned in the text as a valuable source of information for a project audit ?
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