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Mr. Hobbes Bed & Breakfast is considering the replacement of some old equipment. The new equipment...

Mr. Hobbes Bed & Breakfast is considering the replacement of some old equipment. The new equipment will cost $86,000 including delivery and installation. The old equipment to be replaced has a book value of $60,200 and can be sold pre-tax for $61,200. If the firm’s effective tax rate is 25%, compute the net investment.

$25,550

$25,050

$25,800

$24,800

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Answer #1

Computation of loss/gain on sale of old equipment

Book value of old equipment = $60,200

Sale value = $61,200

Gain = $1000

Tax on gain = $1000*25% = $250

Net Gain = $750

Computation of Net Investment:

Cost of new equipment = $ 86,000

Less: Sale value post tax (61,200 - 750) = $60,450

Net Investment = $25,550

Option 'A' is correct

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