A firm has decided to replace an existing asset with a newer Model. The existing

Question

A firm has decided to replace an existing asset with a newer Model. The

   existing asset originally cost $30,000 . The current book value of the existing

   asset for tax purposes is $ 14,400. The existing asset can be sold for

   $ 25,000. The new asset will cost $ 75,000. If the assumed tax rate is 40 %    

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

    A. $ 42,000

    B. $ 52,440

    C. $ 54,240

    D. $ 50,000                                                                       

Explanation / Answer

The tax for the sale of the asset is calculated as below:

25000-14400 = $10,600. The tax is 40% . hence the tax amount is 0.4*10600 = 4240

Hence the total profit is 25000-4240 = $20,760

The total cost of the new asset will now b 75000 - 20760 = 54,240

Hence answer is option C: 54,240

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