Trinitron,Inc.purchased a new molding machine for $85,000.The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets.Trinitron,Inc.must maintain a supply of special lubricating oil just in case the machine breaks down.The company purchased a supply of oil for $4,000.The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years.Trinitron is replacing an old machine that was purchased 6 years ago for $50,000.The old machine was being depreciated on a straight-line basis over a ten year expected useful life.The machine was sold for $15,000.Trinitron's marginal tax rate is 40%.What is the amount of the initial outlay?

Question

Quizplus · Accepted Answer

The initial outlay includes the cost of the machine, shipping, integration, and the supply of special lubricating oil. Therefore, Initial Outlay = $85,000 + $8,000 + $7,000 + $4,000 = $104,000. However, since the company is replacing an old machine, we need to deduct the salvage value of the old machine and any tax implications from the initial outlay. The salvage value of the old machine is $15,000, which reduces the initial outlay to $89,000. The tax implications of selling the old machine will also provide tax savings which can be calculated by multiplying the salvage value by the marginal tax rate (i.e. $15,000 x 0.4 = $6,000). This tax savings reduces the initial outlay further to $83,000. Therefore, the total initial outlay is $89,000 - $6,000 = $87,000.