Your company is considering a replacement of an old delivery van with a new one

Question

Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine? (Points : 1)
A savings of $1,750
A savings of $3,500
Additional taxes paid of $1,750
A tax savings of $1,200

Explanation / Answer

Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000.

The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000.

The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine? (Points : 1)

(full cost of new van)(rate) =

[old van sale + new van's full cost] x rate =

- $5,000 + $30,000 + $75,000 + $5,000 - ($22,000 x 5) - 15,000 - $3000 =

37,000 - 110,000 = - $23,000

- 23,000 x 0.35 = - 8,500 + 5,000 sale price of old van = $3,500 savings

A savings of $1,750
A savings of $3,500
Additional taxes paid of $1,750
A tax savings of $1,200

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