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 $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 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. $27,600
b. $44,360
c. $49,240
d. $48,560

Explanation / Answer

The answer is 34,000

(Cost new asset+install cost)-(proceeds sale of old asset-tax on sale) +OR-Net working capital.

80,000+30,000=110,000

30,000-1,2000=18000

4,000 100000-24000+4000= 80,000

110000-80000+4000= $34000

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