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The Stargate Company is contemplating the replacement of its old space-time machine with a new model...

The Stargate Company is contemplating the replacement of its old space-time machine with a new model costing $420,000. The old machine, which originally cost $500,000, has 5 years of expected life remaining and a current book value of $100,000 versus a current market value of $200,000. Stargate's corporate tax rate is 40 percent. If Stargate sells the old machine at market value, what is the initial after-tax outlay for the new space-time machine?

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Answer #1

Gain from selling old machine = Selling price - book value

Gain from selling old machine = 200,000 - 100,000

Gain from selling old machine = $100,000

After-tax gain from selling old machine = 100,000 * (1 - 0.40) = $60,000

The initial after-tax outlay for the new space-time machine = New model cost - After-tax gain from selling old machine

The initial after-tax outlay for the new space-time machine = 420,000 - 60,000

The initial after-tax outlay for the new space-time machine = $360,000

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