Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm's tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.

Question

Quizplus · Accepted Answer

The net cash outflow is calculated as the purchase price of the new machine minus the after-tax proceeds from the sale of the old machine. The after-tax proceeds are the market value minus the tax on the gain (market value - book value). Gain = $18,000 - $32,000 = -$14,000 (a loss, so no tax). Net cash outflow = $70,000 - $18,000 = $52,000.

Firm X Is Considering the Replacement of an Old Machine