Bailey Pty Ltd Is Considering Modernising Its Production by Purchasing

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 tax effect of selling the new machine in 2011 would be

A) $5,000
B) $3,000
C) $2,000
D) $0