Bailey Pty Ltd is considering modernising its production by purchasing a new machine and selling an old machine. The following data have been collected on this investment: The income tax rate is 40%, and the required rate of return is 16%. Depreciation is $5,000 per year for the old machine. The new machine would be depreciated $7,600 in 2008, $5,700 in 2009, $3,800 in 2010, and $1,900 in 2011. Assume Bailey would purchase the new machine in December 2007 and dispose of the old machine in January 2008.
The net cash flow associated with selling the old machine in January 2008 (i.e., the value of the sale and any tax consequences) would be

Question

Quizplus · Accepted Answer

The net cash flow associated with selling the old machine in January 2008 can be calculated as follows:

Sale value of old machine = $15,000
Book value of old machine = $5,000 (assuming straight-line depreciation over 5 years)
Taxable gain on sale = $10,000
Income tax on gain = $4,000 (40% of $10,000)

Net cash flow = Sale value - Book value - Tax on gain
= $15,000 - $5,000 - $4,000
= $6,000

Therefore, the net cash flow associated with selling the old machine in January 2008 is $6,000, which is closest to option D ($11,000). None of the given options match the correct answer, so the best choice is D as it is the closest option.

Bailey Pty Ltd Is Considering Modernising Its Production by Purchasing