A company installed a piece of equipment with a 5-year life and no salvage value. The...

A company installed a piece of equipment with a 5-year life and no salvage value. The new equipment costs $500,000 and will generate $150,000 in savings each year. Old equipment with a book value of $50,000 and a remaining life of 2 years was sold for $20,000. No changes in working capital are anticipated. The effective income tax rate is 40%. The total initial investment for the new equipment is a. $450,000. b. $468,000. c. $500,000. d. $550,000.

Expert Solution

Correct option is "b" - 468000

working :

a)Gain/(loss) on sale =sale value -book value

= 20000 -50000

= -30000 loss

Tax saving sue to loss =Loss*tax rate

= -30000*40%

= -12000

After tax sale value = 20000 - (-12000)

= 20000+12000

= 32000

Now ,

Purchase cost	500000
less:After tax sale value	-32000
Initial investment	468000

ekkarill92 answered 1 year ago

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