The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine?

Question

Quizplus · Accepted Answer

To find the initial after-tax outlay, we need to calculate the cash inflow from the sale of the old machine and the cash outflow for the purchase of the new machine.

Cash inflow from sale of old machine:

Market value of old machine = $24,000

Book value of old machine = $30,000

Taxable gain = Market value - Book value = $24,000 - $30,000 = -$6,000 (Since the market value is less than the book value, there is a loss)

Tax savings from loss = Tax rate * Taxable loss = 0.4 * (-$6,000) = -$2,400

Cash inflow = Market value + Tax savings = $24,000 - $2,400 = $21,600

Cash outflow for purchase of new machine = -$60,000

Initial after-tax outlay = Cash inflow - Cash outflow = $21,600 - $60,000 = -$33,600

Therefore, the best choice is C.

The Target Copy Company Is Contemplating the Replacement of Its