Hot Air Company is contemplating the replacement of its old printing machne with

Question

Hot Air Company is contemplating the replacement of its old printing machne with a new model The Hot Air C costing S 6 0.000. The old machime, which originally cost $40,000, has 6 years of expected life a current book value of s 25,000 versus a current market value of S 13,000 The firm's corporate tax rate is 40 percent If the company sells the old machine at market value, what is the tax outlay for the new printing machine Cash outflow must be a negative number Round it a whole dollar and do not include the S sign

Explanation / Answer

Loss on sale = current market value - current book value

          = 13000 - 25000

           = - 12000

Tax saving due to loss = -12000*.40 = - 4800

Sale value after tax = 13000- [-4800]

            = 13000+4800

            = 17800

Purchase cost -60000 After tax sale proceeds 17800 After tax outlay -42200

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