Your company is considering a replacement of an old delivery van with a new one

Question

Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years                     ago. The old van is being depreciated using the simplified straight line method over a useful life of 8 years. The old van could be sold today for $7,000. The                     new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company products. Cost savings from use of the new van are                     expected to be $ 28,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated                     using the simplified straight line method over its 5 year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the                     inception of the project, but this amount will be recaptured at the end of year five.

What is the tax effect of selling the old machine?

TIA

Explanation / Answer

Book value of Old Machine = $40000 - (40000/8) x 5 = $15000

Sale value of Machine = $7000

Loss on sale of old machine = $15000 - $7000 = $8000

Hence, Tax saving on Capital loss occured on sale of old machine = $8000 x 35% = $2800

What is the tax effect of selling the old machine?

There will be tax saving of $2800

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