XYZ company is considering replacing an old machine with a new one. Two months a
ID: 2698538 • Letter: X
Question
XYZ company is considering replacing an old machine with a new one. Two months ago their chief engineer completed a training seminar on the new machines operation and efficiency. The $3,000 cost for this training session has already been paid. If the new machine is purchased, it would require $7000 in installation and modification costs to make it suitable for operation in the factory. The old machine originally cost $80,000 five years ago and is being depreciated by $10,000 per year. The new machine will cost $100,000 before installation and modification. It will be depreciated by $12,000 per year.The old machine can be sold today for $12,000. The marginal tax rate for the firm is 40%. Compute the relevant initial outlay in this capital budgeting decision.
a) $97,800 b) 79,500 c) 87,700 d) $90,800
Explanation / Answer
Initital cash outlay = 100,000+7000 - 12000 - (30000-12000)*40% = $87800
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