| 1 | A company is contemplating the replacement of its old printing machine with a new model. The details of this transaction are below. If the company sells the old machine at market value, what is the net after-tax outlay for the new printing machine? | ||||||||
| Cost of the new machine = | $35,000 | ||||||||
| Current book value of old machine = | $8,000 | ||||||||
| Current market value of old machine = | $7,000 | ||||||||
| Tax Rate = | 25% | ||||||||
| a. | $9,580 | ||||||||
| b. | ($13,250) | ||||||||
| c. | ($27,750) | ||||||||
| Note: The negative numbers simply means that this is a net cash outflow. | |||||||||
| ANS: | |||||||||
| Calculate net after tax cash outlay from new printing machine | |||
| Current book value of old machine | $8,000 | ||
| Current market value of old machine | $7,000 | ||
| Loss on sale of old machine | $1,000 | ||
| Tax benefit on loss @ 25% | $250 | 1000*25% | |
| Total proceeds from old machine | $7,250 | 7000+250 | |
| Purchase price of new machine | -$35,000 | ||
| Proceeds from old machine | $7,250 | ||
| Cash outlay | -$27,750 | ||
| Thus, net after tax outlay for new printing machine is -$27,750 | |||
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