The following data is associated with a proposed replacement project: A machine that originally cost $25,000 and has been depreciated straight line has two years of its expected 5-year life remaining. Its current market value is $15,000. The corporate tax rate is 34%. The cash flow from disposing of the old machine is:
A)$10,000.
B)$15,000.
C)$13,300.
D)$8,250.

Question

Quizplus · Accepted Answer

The cash flow from disposing of the old machine is calculated by considering the market value of the machine, the tax implications of the sale, and the book value of the machine. The book value is found by subtracting the accumulated depreciation from the original cost. With straight-line depreciation over 5 years, the annual depreciation is $25,000 / 5 = $5,000. After 3 years, the accumulated depreciation is $5,000 * 3 = $15,000, making the book value $25,000 - $15,000 = $10,000. Selling the machine for $15,000 results in a gain of $5,000. The tax on this gain is $5,000 * 34% = $1,700. Therefore, the net cash flow from disposal is the sale price minus the tax on the gain, which is $15,000 - $1,700 = $13,300.

The Following Data Is Associated with a Proposed Replacement Project