Determine tax consequences to falcon under both options

Assignment Help Financial Management

Reference no: EM132025538

Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted basis of $400,000 ($700,000-$300,000 depreciation) and a fair market value of $500,000. The AMT adjusted basis is $425,000. The buyer of the drilling equipment would like to close the transaction prior to the end of the calendar year. Falcon is uncertain whether the tax conse- quences would be better if the sale took place this year or next year and is consider-ing the following options.

• $500,000 in cash payable on December 31, 2017.

• The sale is closed on December 31, 2017, with the consideration being a $500,000 note issued by the buyer. The maturity date of the note is January 2, 2018, with the equipment being pledged as security.

Falcon projects that its taxable income for 2017 and 2018 will be $400,000 (gross receipts of about $9.5 million) without the sale. Falcon has other AMT adjustments and tax preferences of $425,000 in 2017, which will not recur in 2018. Determine the tax consequences to Falcon under both options, and recommend the one that is preferable.

Reference no: EM132025538

Questions Cloud

Transfer wealth from stockholders to debt-holders : "The reduction in debt ratio, regardless of the original level of debt, transfer wealth from stockholders to debt-holders, holding other factors constant."

What is the expected return of portfolio : What is the expected return of a portfolio consisting of 75 percent of Stock A and 25 percent of Stock B?

Determine the net present worth of the cash flow : Assuming the contractor's tax rate is 32% per year, determine the net present worth of the cash flow from this machine.

What are the additional income taxes paid : What are the additional income taxes paid because of the project in year 1 if the tax rate is 34%?"

Determine tax consequences to falcon under both options : Determine the tax consequences to Falcon under both options, and recommend the one that is preferable.

Required rates of return are estimated based on debt ratio : Assume that the firm’s optimal debt ratio is 40%. The following required rates of return are estimated based on this debt ratio:

What is the expected cash flow for the last year : What is the expected cash flow for the last year (year 3)? This project does not create incidental effect.

Which project or projects should be purchased : The WACC is 12 percent for both projects. Assume that you have unlimited fund available. which project or projects should be purchased?

Calculations underestimates project npv : "Including sunk costs in the calculations underestimates a project's NPV."

User Account

All Pages