Question

On October 10, 2016, 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, 2017, 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. Straight‐line depreciation over a 10‐year life will be used for book purposes. A double‐declining balance over seven years will be used for tax purposes. (One‐half year of depreciation will be taken in the year of purchase regardless of the date of purchase.)

Required:

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.

Discuss any cash flow impacts related to postponing the purchase of the equipment.

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 your answer.

Answer 1

answer:

the requirements is below

(a)

• The money related effect for putting off of procurement of the hardware would be that with buy of the apparatus the organization may have the capacity to create new sources of income so there would be effect of money inflow, additionally there would be impose funds on premium and devaluation on buy of hardware.
• This will prompt increment in settled resources and increment in liabilities. The market cost would not be affected by any or these effects.

(b)

• The income effects may be the propose income the organization would acquires, likewise there would be impose investment funds on premium and devaluation

(c)

• Purchasing before year-end is a superior choice since the investor riches is influenced by the sum and timing of money streams.
• The income earned later and obtaining done in January will have effect of time estimation of cash and swelling