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QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years

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Answer #1

Correct Answer : B. $109,800

Cost of New machine = $100,000

Installation cost of new machine = $10,000

Book value of old machine = $5,000

Scrap sale price of old machine = $2,000

Loss on sale of old machine = 5000-2000 = $3,000

Tax rate = 40%

Tax shield on loss on sale of old machine = 3000*0.4 = $1,200

Additional working capital required = $3,000

Thus,

Initial outlay for the new machine:

= Cost of new machine + Installation cost + Additional working capital - sale value of old machine - tax shield on loss of sa

= 100,000+ 10.000 +3.000-2.000 -1, 200

= $109,800

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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