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**

**Feel free to ask in case of any query relating to this
question **

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