A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.
A) $42,000
B) $52,440
C) $54,240
D) $50,000

Question

Quizplus · Accepted Answer

The initial investment is calculated as the cost of the new asset minus the after-tax proceeds from the sale of the old asset. The old asset's book value after two years of MACRS depreciation needs to be calculated, and the tax impact on the sale must be considered. The initial investment is $75,000 (cost of new asset) - $20,760 (after-tax proceeds from sale of old asset) = $54,240.

A Corporation Has Decided to Replace an Existing Asset with a Newer