Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm's tax rate for ordinary income is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine?

Question

Quizplus · Accepted Answer

The net cash outflow is the purchase price of the new machine minus the proceeds from the sale of the old machine. The proceeds from the sale of the old machine are the market value of $18,000. The net cash outflow is therefore $70,000 - $18,000 = $52,000. However, the firm will also receive a tax benefit from the sale of the old machine. The tax benefit is the difference between the book value of the old machine and the proceeds from the sale. The tax benefit is therefore $32,000 - $18,000 = $14,000. The net cash outflow is therefore $52,000 - $14,000 = $38,000.

Firm X Is Considering the Replacement of an Old Machine