The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost
$40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after tax outlay for the new printing machine?
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A. B. C. D. E.Explanation
Initial outlay -
Cost of new machine-$60,000 -
Salvage value (old)+ 24,000 -
Tax effect of sale = $6,000(0.4) = + 2,400
After-tax outlay =-$33,600
To calculate the initial after-tax outlay for the new printing machine, we need to consider the tax implications of selling the old machine at market value.
The initial after-tax outlay is the net cash flow required to purchase the new printing machine, taking into account the cash inflow from selling the old machine.
Here's how we can calculate it step by step:
Calculate the tax on the sale of the old machine: The old machine has a book value of $30,000 and a market value of $24,000. Since the market value is lower than the book value, there will be a loss on the sale. The loss on the sale is calculated as the book value minus the market value, which in this case is $30,000 - $24,000 = $6,000. The tax benefit from the loss is the loss multiplied by the corporate tax rate of 40%, which is $6,000 * 0.40 = $2,400.
Calculate the cash inflow from selling the old machine: The market value of the old machine is $24,000, but since we need to consider the after-tax amount, we subtract the tax benefit from the sale: Cash inflow from selling the old machine = Market value - Tax benefit Cash inflow = $24,000 - $2,400 = $21,600.
Calculate the initial after-tax outlay for the new printing machine: The cost of the new machine is given as $60,000. Initial after-tax outlay = Cost of the new machine - Cash inflow from selling the old machine Initial after-tax outlay = $60,000 - $21,600 = $38,400.
The initial after-tax outlay for the new printing machine is $38,400.
Therefore, none of the provided answer choices (A, B, C, D, or E) matches the correct value.