Question

A firm is considering replacing an old machine with another. The
new machine costs $100,000 plus $10,000 to install. Assume a 30 percent ordinary tax rate. The asset was
purchased for $80,000 3 years ago and has a book value (undepreciated value) of $20,000.
(a) The asset is sold for $50,000.
(b) The asset is sold for $30,000.
(c) The asset is sold for $20,000,
(d) The asset is sold for $5,000. For each case given, calculate the initial investment of the replacement.

Answer 1

(a) The asset is sold for $50,000.
a	Sale vallue		$             50,000
b	Book value		$             20,000
c	Gain (a-b)		$             30,000
d	Tax On Gain @30%		$               9,000
e	Net Cash Inflow (a-d)		$             41,000
f	Machine Cost plus installation charges		$         1,10,000
g	Initial Investment for Replacement (f-e)		$             69,000
(b) The asset is sold for $30,000.
a	Sale vallue		$             30,000
b	Book value		$             20,000
c	Gain (a-b)		$             10,000
d	Tax On Gain @30%		$               3,000
e	Net Cash Inflow (a-d)		$             27,000
f	Machine Cost plus installation charges		$         1,10,000
g	Initial Investment for Replacement (f-e)		$             83,000
(c) The asset is sold for $20,000,
a	Sale vallue		$             20,000
b	Book value		$             20,000
c	Gain (a-b)		$                      -
d	Tax On Gain @30%		$                      -
e	Net Cash Inflow (a-d)		$             20,000
f	Machine Cost plus installation charges		$         1,10,000
g	Initial Investment for Replacement (f-e)		$             90,000
(d) The asset is sold for $5,000.
a	Sale vallue		$               5,000
b	Book value		$             20,000
c	Loss (a-b)		$           -15,000
d	Tax Saving on loss @30%		$              -4,500
e	Net Cash Inflow (a-d)		$               9,500
f	Machine Cost plus installation charges		$         1,10,000
g	Initial Investment for Replacement (f-e)		$         1,00,500