The Hot Air Company is contemplating the replacement of its old printing machine

Question

The Hot Air Company is contemplating the replacement of its old printing machine with a new model costing s 6 0,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $ 24,000 versus a current market value of S 20,000. The firm's corporate tax rate is 40 percent. If the company sells the old machine at market value, what is the initial after-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

Initial Outlay for Mew printing machine = Purchase cost – Sale proceeds of old machine adjusted of tax

=$60,000-$21,600 = $38,400

Working Note: Calculation of tax on sale proceeds of old machine

Book Value = $24,000

Market Value or Sale Value = $20,000

Loss on Sale of machine = $4,000

Tax Rate = 40%

Savings in Tax = 40% of 4,000 = $1,600

Salvage value adjusted for tax = 20,000+1600 = $21,600

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