Company purchased new machine 2 years ago for 96,000 falls into 5 years macrscan

Question

Company purchased new machine 2 years ago for 96,000 falls into 5 years macrscan currently be sold for 43,800 new eqipment will cost 320,000 it also falls into 5 year macrs new machine will provide the following added cost saving for the next 6 years

1-70,000

2-60,000

3-58,000

4-56,000

5-53,000

6-42,000

tax rate 40% and the cost of capital is 11%

a=what is book value of the old equipment

b=what is tax loss on the sale of old equipment

c=what is tax benefit from the sale

d=what is cash inflow from the sale of old equipment

e=what is cost of new equipment include inflow from the sale of old equip,emt

f=Determine deprication schedule for the new equip,emt

g-determine depreciation of the remaining years of the old

h=determine incremental depreciation between old and new and related tax shield benefits

i=compute after tax benefits of the cost savings

j=add depreciation and tax shield benefits and after cost saving and determine the present value

k-compare the PV of incremenetal benefits to the net cost of new equipment

should the replacement be undertaken?

Explanation / Answer

If an asset is sold it is calculated on the original asset cost LESS depreciation and the difference is recorded in the income statement as asset gain/loss If it is a gain you pay tax on the gain, if a loss you decrease taxable income In 99.9% of the sold items all should be the same as this IS incorporated into the tax return by net income - otherwise the salvage value would be considered if you used the salvage value method but you would still have no addition or subtraction between the net income and your tax return - all that would be already adjusted before tax is computed.

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