Question

A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $45,400. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ______.
Select one:
a. $50,040
b. $42,000
c. $54,240
d. $57,240

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Abdul-Rahim Taysir

Answer 1

given existing cost of asset $30,000

depreciaton table

year	opeing value	Rate	Deprciation	cummulative	book value
1	30,000	20	6,000	6,000	24,000
2	24,000	32	9,600	15,600	14,400
3	14,400	19	5,760	21,360	8,640
4	8,640	12	3,456	24,816	5,184
5	5,184	12	3,456	28,272	1,728
6	1,728	6	1,728	30,000	-

Book value on second year ending 14,400

	particulars	amount
a	sale value	45,400
b	book value	14,400
c	gain	31,000
d	less: Tax @ 40%	12,400
	Net inflow (a-d)	33,000
	Cost of new assest	75,000
	less: net infow of sale proceed	33,000
	Intilal investment	42,000