Question

A company is considering replacing an old machine, which has a market value of $95,000 and a tax basis of $145,000. The new machine would cost $210,000 and would cause a $25,000 reduction in working capital because of the need for fewer spare parts. If the company’s tax rate is 39%, what would be the initial cash outlay for this replacement project?

Answer 1

Answer:

$120,500

Explanation:

Net cash outflow for the new machine = Cost of new machine + net working capital - salvage value of old machine + tax (salvage value of old machine - book value of old machine)

tax (salvage value of old machine - book value of old machine) =

0.39 x ($95,000 - $145,000) = $-19,500

$210,000  + $25,000 - $95,000 -$19,500 = $120,500