Question

a corporation has decided to replace an existing asset with a newer model. two years ago, the existing asset originally cost $30,000 and was being depreciated under macrs using a five-year recovery period. the existing asset can be sold for $25,000. the new asset will cost $75,000 and will also be depreciated under macrs using a five-year recovery period. if the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is .

Answer 1

Net cost of new equipment is $54,240.

What is Net cost?

The terms "net cost" and "net price" are occasionally used interchangeably. After all reductions and rebates have been applied, the customer's final payment is known as the net cost. Taxes and other supplemental expenses are not included. The net price, on the other hand, is the total cost the consumer pays and includes all additional fees.

Purchase price of old equipment = $30,000

Old equipment is 2 year old and depreciation is computed based on MARCS method.

So percentage inflation in first 2 year = 20% + 32%

= 52%.

So,old equipment is 52% depreciated.

So book value of old equipment = $30,000 × (1 - 52%)

= $14,400.

Sale price of old equipment = $25,00

Tax rate = 40%

After tax sale price = $14,400 + ($25,000 - $14,400) × (1 - 40%)

= $14,400 + $6,360

= $20,760

After tax net proceed from sale of old equipment is $20,760.

Purchase price of new equipment = $75,000

Net cost of new equipment = $75,000 - $20,760

= $54,240

Net cost of new equipment is $54,240.

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