The Hot Air Company is contemplating the replacement of its old printing machine

Question

The Hot Air Company is contemplating the replacement of its old printing machine with a new model costing $ 7 0,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $ 23 ,000 versus a current market value of $ 28 ,000. The firm's corporate tax rate is 40 percent. If the company 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

Gain on sale of old machine = current market value - current book value

                         = 28000 - 23000

                        = 5000

Tax on gain = 5000*.40 = 2000

After tax sale value = 28000 - 2000 = $ 26000

Initial cash outlay = purchase cost +after tax sale value

               = -70000 +26000

               = $ -44000

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.