The Home Store Company is contemplating the replacement of its old printing mach

Question

The Home Store Company is contemplating the replacement of its old printing machine with a new model costing S 6 0,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $ 24 ,000 versus a current market value of $ 27,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine? Cash outflow must be a negative number! Round it a whole dollar and do not include the $ sign.

Explanation / Answer

Answer-

Calculation of profit on sale of old machine-

Sale value = 27,000

Less- Book Value = 24,000

Profit = 3,000

Tax on profit = 3,000*40% = 1,200

Net cash inflow = 27,000-1,200

= 25,800

Cash outflow for new machine = -60,000

Net cash outflow for the new machine = -60,000+25,800

= -34,200

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