Disquotek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lrc}
& \underline{\text { Old Equipment}}&
\underline{\text { New Equipment}}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual amortization } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$
The after-tax cash flows from selling the old equipment are:

Question

Disquotek, Inc., is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lrc}
& \underline{\text { Old Equipment}}&
 \underline{\text { New Equipment}}\
 \text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual amortization } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$
 The after-tax cash flows from selling the old equipment are:

Quizplus · Accepted Answer

The after-tax cash flows from selling the old equipment can be calculated as follows: The current selling price of the old equipment is $14,400. The book value of the old equipment is its purchase cost minus accumulated amortization. Since the equipment has an 8-year life and an annual amortization of $1,500, the accumulated amortization for one year would be $1,500. The book value then is $12,000 (purchase cost) - $1,500 (accumulated amortization for one year) = $10,500. The gain on sale is $14,400 (selling price) - $10,500 (book value) = $3,900. The tax on the gain is 40% of $3,900 = $1,560. Therefore, the after-tax cash flows from selling the equipment are $14,400 (selling price) - $1,560 (tax on gain) = $12,840. However, this calculation does not match any of the provided options directly, indicating a need for reevaluation based on the provided choices and the correct approach to calculating the after-tax cash flow. Given the options, the correct calculation involves considering the immediate cash inflow from the sale and adjusting for taxes correctly. The error in the initial explanation suggests a mistake in the calculation or interpretation of the given options. The correct approach should involve calculating the tax impact on the sale correctly, considering the book value accurately, and ensuring the calculation aligns with the options provided. Given the discrepancy, the correct answer should reflect the accurate after-tax benefit of selling the old equipment, considering all financial impacts accurately.

Disquotek, Inc The After-Tax Cash Flows from Selling the Old Equipment Are