Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the tax rate is 40%, the initial investment outlay for the new machine is _____.
A) $24,600
B) $30,000
C) $14,000
D) $16,000
E) $36,000

Question

Quizplus · Accepted Answer

The initial investment outlay is calculated as the cost of the new machine minus the after-tax salvage value of the old machine. The after-tax salvage value is the market value minus taxes on the gain from the sale. Gain = $14,000 - $5,000 = $9,000. Tax on gain = 40% of $9,000 = $3,600. After-tax salvage value = $14,000 - $3,600 = $10,400. Initial investment = $30,000 - $10,400 = $19,600.

Tech Engineering Company Is Considering the Purchase of a New