The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000.The old machine,which originally cost $40,000,has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000.Target's corporate tax rate is 40 percent.If Target sells the old machine at market value,what is the initial investment outlay (after-tax)for the new printing machine?
A) −$22,180
B) −$30,000
C) −$33,600
D) −$36,000
E) −$40,000

Question

Quizplus · Accepted Answer

The initial investment outlay (after-tax) for the new printing machine is the cost of the new machine minus the after-tax proceeds from the sale of the old machine. The after-tax proceeds from the sale of the old machine can be calculated as:

After-tax proceeds = (sale price - book value) x (1 - corporate tax rate)
After-tax proceeds = ($24,000 - $30,000) x (1 - 0.4)
After-tax proceeds = -$3,600

The initial investment outlay (after-tax) for the new machine can be calculated as:

Initial investment outlay = cost of new machine - after-tax proceeds from sale of old machine
Initial investment outlay = $60,000 - (-$3,600)
Initial investment outlay = $63,600

Therefore, the best choice is C.

The Target Copy Company Is Contemplating the Replacement of Its