10. The Belle Library is replacing its old and beastly cataloguing equipment wit

Question

10. The Belle Library is replacing its old and beastly cataloguing equipment with new, stateof the art equipment. The new equipment is expected to significantly reduce catalouing costs f the library. The old equipment originally cost of $9,000 and was depreciated on a straight ine basis to zero for tax purposes. Its current book value (for tax purposes) is $1,000, bu in can be sold immediately for only $3,000. Belle has an effective income tax rate of 30%The sale of the old equipment will generate: a) additional taxes of $300. b) additional taxes of $600. c) a tax shield of $600. d) a tax shield of $300. e) Some other answer.

Explanation / Answer

The correct choice is b

Explanation :- As per the current book value of the asset, the sale of the asset will generate $ 300 in taxes i.e. 0.30 * $ 1000. However, the current market value is greater than the book value and by disposing the asset, the actual income taxes equals $ 900 i.e. 0.30 * $ 3000 = $ 900 . Thus the sale of the old equipment will generate additional taxes of $ 600.

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