Question

# Texas Tires is considering replacing an old machine with a new, more efficient, one.  The new machine...

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.

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

#### Earn Coins

Coins can be redeemed for fabulous gifts.