Question

QUESTION 24 A firm will replace an old machine with a book value of $22,000 with a new one costing $130,000 The old machine will be sold for $30,000. Calculate the net initial cash outlay (PVO) if the tax rate is 39%.

		$98,476
		$109,847
		$103,120
		$145,287
		none of the above

Answer 1

Step 1: Calculation of Net proceeds from sale of old machine after tax

Particulars	Amount
Sale Value of old machine ...A	$30,000.00
Less: WDV of Asset	$22,000.00
Profit on Sale of Asset	$8,000.00
Tax @ 39% ($8,000x39%) ...B	$3,120.00
Net proceeds from sale of old machine after tax ...A-B	$26,880.00

Step 2: Calculation of  the net initial cash outlay (PVO)

Particulars	Amount
Cost of New Machine	$130,000.00
Less: Net proceeds from sale of old machine after tax	$(26,880.00)
Net initial cash outlay	$103,120.00

Ans: Net initial cash outlay = $103,120.00