Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset is from the same CCA pool as the existing asset and will be depreciated using a 20% CCA rate. The existing equipment, which originally cost $25,000 and will be sold for
$10,000, has been depreciated for three years. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

-The initial outlay equals__________
A) $43,000
B) $41,100
C) $38,800
D) $38,960

Question

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset is from the same CCA pool as the existing asset and will be depreciated using a 20% CCA rate. The existing equipment, which originally cost $25,000 and will be sold for
$10,000, has been depreciated for three years. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

-The initial outlay equals__________
A) $43,000
B) $41,100
C) $38,800
D) $38,960

Quizplus · Accepted Answer

The initial outlay is the cost of the new asset plus the installation costs, minus the proceeds from the sale of the old asset. The cost of the new asset is $50,000, the installation costs are $3,000, and the proceeds from the sale of the old asset are $10,000. Therefore, the initial outlay is $50,000 + $3,000 - $10,000 = $43,000.