Question

Kohler Inc. wants to replace a 10 year old machine with a new machine that is more efficient. The old machine cost $80,000 when new and has a current book value of $15,000. Kohler can sell the machine to a foreign buyer for $12,000. Kohler's tax rate is 21%. The effect of the sale of the old machine on the initial outlay for the new machine is:______a. $14,350.b. $9,100.c. $13,650.d. $1,000.

Answer 1

no option is correct, the correct answer is $12,630

Step-by-step explanation:

after tax salvage value of old machine = $12,000 - [($12,000 - $15,000) x 21%] = $12,000 - (-$3,000 x 21%) = $12,000 - -$630 = $12,630

the tax shield generated by this loss (market value is lower than book value) = $630

the cash received form the sale = $12,000

the combined effect = $12,000 + $630 = $12,630