Question
Garfield plc is considering whether to enter into a new project. The machinery which would be used to produce the goods for the contract was
Garfield plc is considering whether to enter into a new project. The machinery which would be used to produce the goods for the contract was purchased seven years ago at a cost of $80,000, with an estimated life of ten years. Depreciation is on a straight line basis. The machinery has been idle for some time, and if not used on this contract would be scrapped and sold immediately for an estimated $5,000. After use on this contract the machinery would have no value, and would have to be dismantled and disposed of at a cost of $1,500.
Ignoring the time value of money, what is the relevant cost of the machine to the new contract?
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Your colleague raises some valid points regarding the limitations of financial ratios when analyzing BudgeDine plc for a potential 40 stake investmentHoweverits important to consider both sides of the argument and understand how to navigate these limitations effectively Limitations of Financial Ratios Subjectivity Depreciation valuation provisions and cash flow estimates can indeed involve subjective judgments by accountants However accounting standards and best practices aim to minimize inconsistencies Limited scope Ratios only capture a specific snapshot of a companys financial health based on data the accountant chooses to measure They dont paint the entire picture Lack of standardization While there are common ratios interpreting them can vary depending on industry company size and economic conditions Countering the Limitations Use Ratios Alongside Other Metrics Combine ratios with qualitative factors like industry trends management quality and competitive landscape for a more holistic view Benchmarking Compare ratios to relevant industry benchmarks and historical trends to assess relative performance Understand Assumptions Seek information about the accounting policies and assumptions used allowing for better interpretation of the ratios Due Diligence Dont solely rely on ratios conduct thorough due diligence including analyzing financial statements business operations and market conditions Responding to Your Colleague Acknowledge the limitations of ratios but emphasize their usefulness as starting points for analysis not definitive conclusions Highlight the importance of understanding the underlying assumptions and using other measures for a comprehensive picture Suggest conducting thorough due diligence beyond just analyzing ratios to make an informed investment ...
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Introduction To Federal Income Taxation In Canada
Authors: Robert E. Beam, Stanley N. Laiken, James J. Barnett
33rd Edition
1554965020, 978-1554965021
