Question

Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm's tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.

Answer 1

Answer:

$47,800

Explanation:

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

$70,000 - $18,000 + 0.3($18,000 - $32,000)

$70,000 - $18,000 + (0.3 × $-14,000) = $47,800

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