1 points QUESTION 10 A company is evaluating the possible replacement of equipme

Question

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QUESTION 10

A company is evaluating the possible replacement of equipment. New equipment would cost $90,913, and sales tax on the purchase would be 3%. Both the purchase price and sales tax would be capitalized. The old equipment had an original purchase price of $70,000 and accumulated depreciation of $32,000 has been taken. The old equipment can be sold currently for $28,222, and the company pays taxes at a rate of 37%. What is the initial cash outlay necessary to replace the existing equipment? Round your answer to the nearest whole dollar.

Explanation / Answer

Answer:

Here we can say that the book value of the old asset is not relevant for making any cash flow calculation as it is sunk cost.

So $70000 which is the book value of the asset is not relevant for us.

Salvage value of the old equipment = $28222

Tax rate = 37%

So after tax salvage value = $28222 x (1-0.37) = $17779.86

Also it is given that:

Purchase price of the new equipment = $90913

And sales tax pain on its PP = 3% x $90913

                                              = $2727.39

So the Cash outlay to replace the asset = $90913 + $2727.39 - $17779.86

                                                                = $75860.53

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