Question

Apacer Corporation is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. The firm's tax rate for ordinary income is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine?

Answer 1

The net cash outflow is computed as follows:

= Purchase price - Market value of old machine - [ (Book value - Market price) x tax rate ]

= $ 70,000 - $ 25,000 - [ ($ 32,000 - $ 25,000) x 0.30 ]

= $ 70,000 - $ 25,000 - $ 2,100

= $ 42,900

So, the net cash outflow is $ 42,900