A company is evaluating the possible replacement of equipment. New equipment wou

Question

A company is evaluating the possible replacement of equipment. New equipment would cost $106,965, and sales tax on the purchase would be 5%. 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 $29,829, 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

Book value of old equipment = 70000 - 32000 =38000

Loss on sale of equipment = 29829 -38000 = -8171

Tax savings due to loss = 8171 * .37 = $ 3023.27

AFter tax cash Inflow from sale of old equipment = 29829 + 3023.27 = 32852.27

Cash outflow = 106965 (1+.05) = 112313.25

Net initial cash outlay = 112313.25 - 32852.27 = $ 79460.98   [Rounded to 79461 ]

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