Question

Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm's tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.

A. $47,800
B. $70,000
C. $52,000
D. $40,100 20.

Answer 1

A. $47,800

Step-by-step explanation:

Calculation to determine the net cash outflow for the new machine after considering the sale of the old machine

First step

Loss on sale of old machine = 18000 - 32,000

Loss on sale of old machine = ($14,000)

Second step

Tax savings from loss on sale=14,000 x 30%

Tax savings from loss on sale = $4200

Third step

Net benefit from sale of old machine = Sales proceeds + tax on loss of sale

Net benefit from sale of old machine= $18,000 + $4200

Net benefit from sale of old machine= $22,200

Now let determine the Net cash outflow for new machine

Net cash outflow for new machine = Cost of new machine – Net benefit

Net cash outflow for new machine= $70,000 – $22,200

Net cash outflow for new machine= $47,800

Therefore the net cash outflow for the new machine after considering the sale of the old machine is $47,800