A corporation has decided to replace an existing asset with a newer model. Two y
ID: 2646608 • Letter: A
Question
A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is
a) $42,000. b) $52,440. c) $54,240. d) $50,000Explanation / Answer
Using MACRS Depreciation schedule
Accumulated Depreciation = 30000*(20% + 32%)
Accumulated Depreciation = 15600
Book Value = 30000 - 15600
Book Value = 14400
Sale Value = 25000
Tax on Profit on sale of existing machine = (Sale Value - book Value)*Tax rate
Tax on Profit on sale of existing machine = (25000-14400)*40%
Tax on Profit on sale of existing machine = 4240
After Tax sale value = 25000 - 4240
After Tax sale value = 20760
Initial investment = New Asset cost - After Tax sale value of existing asset
Initial investment = 75000 - 20760
Initial investment = $ 54,240
Answer
c) $54,240.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.