Question

Testbank Question 55 Bailey Corporation is considering modernizing its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: New Machine Old Machine Cost Accumulated amortization Remaining life Current salvage value Salvage value in 4 years Annual cash operating costs $40,000 $20,000 4 years $5,000 $0 $18,000 Cost Estimated useful life Salvage value in 4 years Annual cash operating costs $19,000 4 years $5,000 $14,000 The income tax rate is 40%, and the required rate of return is 16%. Amortization is $5,000 per year for the old machine. The new machine would be amortized $7,600 in 20x5, $5,700 in 20x6, $3,800 in 20x7, and $1,900 in 20x8. Assuming the old machine is not disposed of, Bailey's 20x5 amortization tax shield for the old machine is: 0 $5,000 0 $4,000 O $3,000 O $2,000

Answer 1

Amortization tax shield for the old machine = Amortization per year * Income tax rate = 5000 * 40%

2000