A company is evaluating the possible replacement of equipment. New equipment wou
ID: 2764065 • Letter: A
Question
A company is evaluating the possible replacement of equipment. New equipment would cost $85,967, 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 $25,513, 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
Solution :
Old equipment
Purchase price
70,000
Less : accumulated Depreciation
- 32,000
Book value
38,000
Sale value
25,513
Loss on sale
4,620
net proceeds
30,133
new equipment
Total cost (85967*1.05)
90,265
Less : net proceeds
- 30,133
initial cash outlay necessary to replace the existing equipment
60,132
Old equipment
Purchase price
70,000
Less : accumulated Depreciation
- 32,000
Book value
38,000
Sale value
25,513
Loss on sale
4,620
net proceeds
30,133
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