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 combined tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old machine? Disregard the effect of depreciation of the new machine if acquired.

Question

Quizplus · Accepted Answer

The net cash outflow for the new machine after considering the sale of the old machine is calculated as follows:1. Calculate the tax effect due to the sale of the old machine. Since the market value ($18,000) is less than the book value ($32,000), there is a loss of $14,000 ($32,000 - $18,000). This loss can reduce the taxable income, leading to a tax shield of $14,000 * 30% = $4,200.2. Calculate the net cash inflow from selling the old machine, which is its market value plus the tax shield: $18,000 + $4,200 = $22,200.3. Calculate the net cash outflow for the new machine, which is the purchase price of the new machine minus the net cash inflow from selling the old machine: $70,000 - $22,200 = $47,800.Therefore, the correct answer is A) $47,800.

Firm X Is Considering the Replacement of an Old Machine