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In year 1, Firm A paid $50,000 cash to purchase a tangible business asset. In year...

In year 1, Firm A paid $50,000 cash to purchase a tangible business asset. In year 1 and year 2, it deducted $3,140 and $7,200 depreciation with respect to the asset. Firm A’s marginal tax rate in both years was 21 percent. Now assume that Firm A borrowed $50,000 to purchase the asset. In each year, it paid $3,800 annual interest on the debt. The interest payments were deductible.

How does this change in facts affect Firm A’s net cash flow attributable to the asset purchase in each year?

Year 1 Year 2

Total cash flows before tax:

Total tax (cost) or savings:

Net Cash Flow:

How does this change in facts affect Firm A’s adjusted basis in the asset at the end of each year: either increase, decrease, or no effect

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