Question

The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine?

		-$22,180
		-$30,000
		-$33,600
		-$36,000

Answer 1

Solution :

Statement showing calculation of Initial after-tax outlay for the new printing machine:

Sl.No.	Particulars	Amount
1.	Sale value of the Asset ( i.e., Market value )	$ 24,000
2.	Less : Book value of the Asset	$ 30,000
3.	Loss on sale of Asset = (1) – (2)	- $ 6,000
4.	Tax Rate	40 %
5.	Tax savings on loss of sale of asset = ( $ 6,000 * 0.40 )	$ 2,400
6.	After Tax salvage value = Sale value of asset + Tax savings on loss of sale of asset = $ 24,000 + $ 2,400 = (1) + (5 )	$ 26,400
7.	Investment in new model of printing machine	- $ 60,000
8.	Initial after-tax outlay for the new printing machine = (6) + (7) = $ 26,400 - $ 60,000	- $ 33,600

Thus the Initial after-tax outlay for the new printing machine is = - $ 33,600.

The solution is Option 3 = - $ 33,600