The following data is associated with a proposed replacement project: A machine that originally cost $25,000 has a book value of $12,500 and a current market value is $15,000. A new machine costs $40,000 and has a projected economic life of five years. The corporate tax rate is 34%. The initial after-tax cash outlay, assuming the old machine is sold at its current market value, is:
A)($30,000.)
B)($30,850.)
C)($25,850.)
D)($24,150.)

Question

Quizplus · Accepted Answer

The initial after-tax cash outlay is calculated as the cost of the new machine minus the after-tax proceeds from selling the old machine. The after-tax proceeds are the market value minus taxes on the gain (market value - book value). So, $40,000 - [$15,000 - ($15,000 - $12,500) * 34%] = $25,850.

The Following Data Is Associated with a Proposed Replacement Project