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 percent on ordinary income and capital gains, the initial investment is

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

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 54,240 ============================================================================================================================= please rate my answer with fiev stars

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