Question

Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____.

Answer 1

$19,600

Step-by-step explanation:

The computation of the initial investment outlay is shown below:

For computing the initial investment outlay, first we have to calculate the after tax old machine cost that is shown below:

After tax old machine cost = Current Market value of old machine - {(Current Market value of old machine - book value) × tax rate}

= ($14,000 - {($14,000 - $5,000) × 40%}

= ($14,000 - $3,600)

= $10,400

Now the initial investment outlay for the new machine is

= New machine cost - After tax old machine cost

= $30,000 - $10,400

= $19,600