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 yearâ??s depreciation will be taken in the year of purchase regardless of the date of purchase.)
a. Briefly discuss the financial statement impacts of postponing the purchase of the equipment. Would the market price of the firmâ??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. If the purchase of equipment is postponed briefly discuss how cash flow maybe impacted.
c. Efficient markets assume that stockholder wealth is affected by the amount and timing of cash flows. Which alternate should be considered as more favorite - purchasing before year-end or waiting until the next year? Why?
Postponing the purchase of equipment to January 10, 2006 will also postpone the recording of the fixed assets and loan financing that purchase. Moreover, expense through depreciation will also be lower in the year of postponement, hence net income is higher.
It is highly probable that the postponement of ...