Question 12 (8 points) Corporation is using a machine that originally cost $80,0

Question

Question 12 (8 points) Corporation is using a machine that originally cost $80,000. The machine is being depreciated by the straight- The Taylor line method over eight years ($10,000 per year) and has four years of depreciation remaining. The machine has a book value of $40,000 and a current market value of $31,500. Jacqueline Elliot, the Chief Financial Officer of Taylor, is considering replacing this machine with a newer model costing $73,000. The new machine will save $5,000 in after-tax earnings each year for the next sik years. The new machine is in the 5-year MACRS category. Taylor Corporation is in the 34% tax bracket and has a 10% cost of capital. Calculate the net cost of the new machine after deducting the cash inflow from the sale of the old machine. O 1) $39,950 O 2) $37,406 O 3) $38,610 4) $36,640 Save

Explanation / Answer

Answer is option (3) $38,610 Cash outflow for new machine $73000 Less:cash inflow from sale of old machine ($31500) Add: tax savings on loss on sale of Asset $2890 Net cost of the New machine $38610 Tax salvings on loss on sale of asset =34%*($40,000-$31500) =34%*$8500 =$2890

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