Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of th

Question

Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.

Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%

What is the tax consequence of the sale of the old machine today? Answer is : tax savings of $280, how did I get this? show work.

Explanation / Answer

Asset cost $      11,200 Less: Depreciation charged $         7,000 (11200-1200)*7/10 Book value of assets $         4,200 Sale value of machine $         3,500 Profit/(Loss) on sale $          (700) Less: Tax @ 40% $          (280) After tax salvage value of asset $         3,780

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