Question

Firm X is considering the replacement of an old machine with one that has a purchase price of $90,000. The current market value of the old machine is $24,000 but the book value is $34,000. The firm's combined tax rate is 26%. What is the net cash outflow for the new machine after considering the sale of the old machine

Answer 1

Answer:

Net cash outflow for new machine = $63,400

Explanation:

The computation of the net cash outflow for the new machine is shown below:

Sale proceeds from old machine = $24,000

Add  Tax Savings occured from loss on sale ($34,000 - $24,000) ×  0.26 = $2,600

Net benefit arise from the sale of old machine = $26,600

Less:

Cost of new machine = $90,000

So,

Net cash outflow for new machine = $63,400