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

The initial Investment = - Cost of New Model + After Tax Sale of Old Machine
= -60,000 + 20,000 * ( 1 - 40%) = -60000 + 12,000 = -48000

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