Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.The new van will be depreciated using the simplified straight-line method over its 5-year useful life.The company's tax rate is 35%.Working capital is expected to increase by $5,000 at the inception of the project,but this amount will be recaptured at the end of year five.What is the tax effect of selling the old machine?

Question

Quizplus · Accepted Answer

The old van was purchased for $40,000 and has been depreciated for 5 years, resulting in a book value of $20,000. When it is sold for $7,000, the company will have a loss of $13,000. This loss will be deductible for tax purposes, resulting in tax savings of $2,800 (13,000 * 35%).

Your Company Is Considering the Replacement of an Old Delivery