The Ellsworth Company is contemplating the replacement of their 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.Ellsworth's corporate tax rate is 40%.If Ellsworth sells the old machine at market value,what is the initial outlay (after-tax)for the new printing machine?

Question

Quizplus · Accepted Answer

Initial Cash Flow = - (Price of new asset) + (Net Salvage value of old asset)
Net Salvage value = S - Tax on Sale
Tax on sale = T × (S - B)
Step 1 - Calculate the book value of the old machine.
Book Value = Original Cost - Accumulated Depreciation
Book Value = 40,000 - 10,000 = $30,000
Step 2 - Calculate the tax on the sale of the old asset.
Tax on Sale = 0.4 × (24,000 - 30,000) = -$2,400
Step 3 - Use the tax on sale to calculate the net salvage value.
Net Salvage = 24,000 - (-2,400) = $26,400
Step 4 - Calculate the initial cash flow.
Initial Cash Flow = -60,000 + 26,400 = -$33,600

The Ellsworth Company Is Contemplating the Replacement of Their Old