3. Okie Industries purchased a CNC machine 5 years ago for $125,000. It is being

Question

3. Okie Industries purchased a CNC machine 5 years ago for $125,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of $0. It could be sold now for $50,000. The firm is considering selling if and purchasing a new one. The new CNC machine would cost $208,750 installed and would be depreciated straight-line over 10 years to an estimated $0 salvage value. The firm’s marginal tax rate is 40%. Determine the net investment if the old machine is sold and the new one purchased

Explanation / Answer

Book value before 5 years = $125000

Depreciation so far = $125000 x 5 / 15 = $41666.67

Book Value after 5 years = $125000 – $41666.67 = $83333.33

Profit & Loss on sale = $50000 - $83333.33 = - $33333.33

New investment made = $208750

Net investment = $208750 – $50000 = $158750

Note:

No treatment of tax because here is a loss on sale.

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