Question

The Hot Air Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine which originally cost $40,000 has 6 years of expected life remaining and a current book value of $30,000 versus a current market (salvage) value of 20,000.Target’s corporate tax rate is 40%. If Target sells the old machine at market value, what is the initial after tax outlay for the new printing machine?

1. -$22,180
2. -$33,600
3. -$36,000
4. -$17,050
5. -$30,000
6. -$40,000

Answer 1

Given

New cost machine price = 60,000$ Which is a cash outflow

After tax salvage value can be computed as below

Book Value of the old machine = 30,000$

After tax salvage = Salvage Value - (Salvage Value - Book Value )*Tax rate

Given salvage value of old machine = 20,000$. Book Value of old machine = 30,000, Tax rate = 40%

After tax salvage = 20000 - (20000-30000)*40% = 20000 - (-4000) = 24,000$ which is an inflow

Therefore total cash outlay of thw new printing machine = 60000-24000 = 36,000$

Hence option c that is -36,000$ is the correct answer.