Question

The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine

Answer 1

Answer:

$33,600

Explanation:

For computing the initial after tax outlay , we need to do the following calculations:

1. Determine the profit or loss on sale of old printing machine:

Loss = Sale value - Book value

= $24,000 - $30,000

= $6,000

2. Determine the tax on loss on sale of machine:

= Loss × tax rate

= $6,000 × 40%

= $2,400

3. The after-tax salvage value is shown below:

= Salvage value + loss on tax

= $24,000 + $2,400

= $26,400

4. Now the initial after tax outlay would be

= Machine cost - after-tax salvage value

= $60,000 - $26,400

= $33,600