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Questions: 1. Assuming that the tax laws require accountants to use a 10-year straight-line depreciation of...

Questions:

1. Assuming that the tax laws require accountants to use a 10-year straight-line depreciation of the original purchase price net of the salvage value (e.g., a $10,000 piece of equipment with a salvage value of $1,000 would have annual depreciation of ($10,000 - $1,000)/10 = $900), calculate the annual accounting profits.
2. Calculate the economic profits using the average annual opportunity cost of the capital. See ML203's third example for guidance.
You are given the following information for a healthcare company:
line #
1 Total revenue                18,000,000
2 Total non-capital costs                14,400,000
3 Capital equipment purchase price and original market value                12,000,000
4 Equipment salvage value, as percent of purchase price 12%
5 Depreciable life of the capital equipment, years 15
6 Annual return on capital invested in a similarly risky investment

11%

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Answer #1

Computation of Economic profis. nue Total Revenue - Total non capital cost 18,000 000 14, 400,000 3600000 (-) depreciation 11

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