Your company is considering replacing an old steel cutting machine with a new one.Two months ago,you sent the company engineer to a training seminar demonstrating the new machine's operation and efficiency.The $2,500 cost for this training session has already been paid.If the new machine is purchased,it would require $5,000 in installation and modification costs to make it suitable for operation in your factory.The old machine originally cost $50,000 five years ago and has been depreciated by $7,000 per year for five years up to now.The new machine will cost $75,000 before installation and modification.It will be depreciated by $5,000 per year.The old machine can be sold today for $10,000.The marginal tax rate for the firm is 40%.Compute the relevant initial outlay in this capital budgeting decision.
A)$72,500
B)$68,000
C)$70,500
D)$78,000

Question

Quizplus · Accepted Answer

The relevant initial outlay can be calculated as follows:

Sale of old machine = $10,000
Cost of new machine = $75,000
Installation and modification costs = $5,000
Depreciation tax shield for first year = $5,000 x 0.4 = $2,000

So, total initial outlay = $75,000 + $5,000 - $10,000 - $2,000 = $68,000

Therefore, the best choice is B) $68,000.

Your Company Is Considering Replacing an Old Steel Cutting Machine