A corporation has decided to replace an existing asset with a newer model. Two y

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% on ordinary income and capital gains, what is the initial investment?

A. $52,440 B. $54,240 C. $50,000 D. $42,000

Explanation / Answer

  Year 0 Year 1 Year 2         Cost of old Machine             30,000             Depreciation   20% 32% Depreciation Expense              6,000           9,600         Depreciated Cost at Year 2             14,400         Sales Price             25,000         Gain             10,600         Tax Rate     40%         Tax     4240         Net Sale             20,760         Cost of New Machine             75,000         Net Cost of New Machine Answer B          54,240

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