Margo Inc.wants to replace a 9-year-old machine with a new machine that is more efficient.The old machine cost $70,000 when new and has a current book value of $15,000.Margo can sell the machine to a foreign buyer for $14,000.Margo's tax rate is 35%.The effect of the sale of the old machine on the initial outlay for the new machine is

Question

Quizplus · Accepted Answer

The correct answer is A because the effect of the sale of the old machine on the initial outlay for the new machine is ($14,350). This is calculated as follows:Book value of old machine: $15,000Sale price of old machine: $14,000Tax on gain from sale: $35% x ($14,000 - $15,000) = $350Net proceeds from sale: $14,000 - $350 = $13,650Initial outlay for new machine: $70,000 - $13,650 = $56,350Effect of sale of old machine on initial outlay: $56,350 - $70,000 = ($14,350)

Margo IncWants to Replace a 9-Year-Old Machine with a New Machine