Riordan Manufacturing Company is considering replacing a machine. The machine was purchased 6 years ago for $80,000 and has been depreciated straight line over an 8-year life. The old machine will be sold for a market value of $14,500. The new machine costs $55,000. Assuming a tax rate of 28%, calculate the initial outlay.
A)$38,960
B)$42,040
C)$45,460
D)$51,760

Question

Quizplus · Accepted Answer

The initial outlay is calculated as the cost of the new machine minus the after-tax salvage value of the old machine. The book value of the old machine is $20,000 ($80,000 - 6/8 * $80,000). The gain on sale is $14,500 - $20,000 = -$5,500 (a loss). The tax shield from the loss is $5,500 * 28% = $1,540. The after-tax salvage value is $14,500 + $1,540 = $16,040. The initial outlay is $55,000 - $16,040 = $38,960.

Riordan Manufacturing Company Is Considering Replacing a Machine