Question

Deriving cash flows for asset disposition. Custom Machining Company (CMC) purchased a made-to-order machine tool for grinding machine parts. The machine costs $160,000, and CMC installed it yesterday. Today, a vendor offers a machine tool that will do exactly the same work but costs only $80,000. Assume that the cost of capital is 12 percent, that both machines will last five years, that CMC will depreciate both machines on a straight-line basis for tax purposes with no salvage value, that the income tax rate is and will continue to be 40 percent, and that CMC earns sufficient income that it can offset any loss from disposing of or depreciating the ‘‘old’’ machine against other taxable income. How much, at a minimum, must the ‘‘old’’ machine fetch upon resale at this time to make purchasing the new machine worthwhile?

Answer 1