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A company is evaluating the possible replacement of equipment. New equipment would cost $93,598, and sales...

A company is evaluating the possible replacement of equipment. New equipment would cost $93,598, and sales tax on the purchase would be 5%. Both the purchase price and sales tax would be capitalized. The old equipment had an original purchase price of $70,000 and accumulated depreciation of $32,000 has been taken. The old equipment can be sold currently for $26,535, and the company pays taxes at a rate of 37%. What is the initial cash outlay necessary to replace the existing equipment? Round your answer to the nearest whole dollar.

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Answer #1

Book value of old equipment = Original purchase price - accumulated Depreciation = $70,000 - $32,000 = $38,000

Loss on sale of old equipment = Salvage value - Book value = $26,535 - $38000 = $11,465

Tax shield on loss on sale = $11465 x 37% = $4242.05

Total purchase price of new equipment = Purchase price + Sale tax = $93,598 + 5% x $93,598 = $98,277.90

Initial cash outlay = Total purchase price of new Equipment - Salvage value of old equipment - Tax shield on loss on sale

or, Initial cash outlay = $98,277.90 - $26,535 - $4242.05 = $67,500.85

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