Answer:
E. Outflow of $32,075
Explanation:
<h2>At Year 0, the cash outflow is calculated as under:</h2>
Year 1 Outflow = Investment in the New asset (Step1) + Net working capital required (Step2) - Sale Proceeds from the old machine (Step3) - Tax On the sale of old Machinery (Step4)
Year 1 Outflow = $44,000 + $3,000 - $17,000 + $2,075 = $32,075
<h2><u>
Step 1: Investment in the New asset</u></h2>
Now here:
Investment in the New Asset = New machine cost + Transportation of asset + Installation of asset
By putting values, we have:
Investment in the New Asset = 40000 + 2000 + 2000 = $44,000
<h2><u>
Step 2: Net working capital required</u></h2>
Now
Net working capital required = $7,000 Investment in Inventory - $4,000 Increase in payables = $3,000
<h2><u>
Step 3: Sale Proceeds from the old machine</u></h2>
Fair Value of the Old Machine is $17000 which means this would be the sales proceeds on the old machinery's sales.
<h2><u>
Step 4: Tax On the sale of old Machinery</u></h2>
Old machine purchased 3 year ago at = $30,000
Depreciation schedule and book value of old machine are as follows:
Year 1 2 3 4 5 6
MACRS Rate 20% 32% 19% 12% 11% 6%
Depreciation 6000 9600 5700 3600 3300 1800
Acc. depre. 6000 15600 21300 24900 28200 30000
Book value 24000 14400 8700 5100 1800 0
Now
From the table we can see that the Book value of the asset at the end of the year 3 is $8,700.
Tax on the gain of the asset = ($17,000 - 8,700) * 25% = $2,075
