Question

ABC is considering replacing the existing unit with a newer, more efficient one. The unit, which...

ABC is considering replacing the existing unit with a newer, more efficient one. The unit, which originally cost $500,000, currently has a book value of $250,000. The new unit will cost $700,000 and in order to make the new unit operational, shipping and installation costs will require a further $50,000 investment. ABC can sell the existing machine today for $275,000. Assume ABC’s tax rate is 30 percent. How much will be the initial investment of replacing the existing unit?

Question 19 options:

a) (512,500)
b) (522,500)
c) (252,500)
d) None of the above
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Homework Answers

Answer #1

Cost of new unit = $700,00

Further installation = $50,000

Total cost of new unit, incl. installation = $750,000......................... (A)

Sale price of existing machine = $275,000

Book value of existing machine = $250,000

Profit on sale of existing machine = $25,000 (Sale price minus book value)

Tax on profit on sale of existing machine = $25,000 * 30% = $7,500

Cash received on sale of existing machine = Sale price of existing machine minus tax on profit

Cash received on sale of existing machine = $275,000 - $7,500 = $267,500..........(B)

Total initial investment on replacing the existing unit = Total cost of new unit, incl. installation - Cash received on sale of existing machine

Total initial investment = A - B = $750,000 - $267,500 = $482,500

Correct answer = D

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