Question

Texas Tires is considering replacing an old machine with a new, more efficient, one.  The new machine will cost $1.2 million.  The old machine originally cost $714,000 4 years ago and was being depreciated straight line over a 7 year life.  The old machine can now be sold for $325,000. The firm has a 30 % tax rate.   Calculate the initial outlay on the new machine.

Answer 1

The initial outlay is computed as follows:

= cost of new machine - After tax sales value of old machine

After tax sales value of old machine is computed as follows:

Book value now is computed as follows:

= Purchase price - (Purchase price / 7) x 4

= $ 714,000 - ($ 714,000 / 7) x 4

= $ 306,000

Profit on sale is computed as follows:

= Sales value - book value

= $ 325,000 - $ 306,000

= $ 19,000

Tax on profit is computed as follows:

= Profit x tax rate

= $ 19,000 x 30%

= $ 5,700

So, the after tax sales value will be computed as follows:

= $ 325,000 - $ 5,700

= $ 319,300

So, the amount will be as follows:

= $ 1,200,000 - $ 319,300

= $ 880,700

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