Asked by Kaitlyn Simon on Apr 24, 2024
Verified
The following data is associated with a proposed replacement project: A machine that originally cost $25,000 and has been depreciated straight line has two years of its expected 5-year life remaining. Its current market value is $15,000. The corporate tax rate is 34%. The cash flow from disposing of the old machine is:
A) $10,000.
B) $15,000.
C) $13,300.
D) $8,250.
Corporate Tax Rate
The share of a company's earnings required to be paid to the government as tax.
Straight Line
A method of calculating depreciation of an asset, where the asset's cost is evenly spread over its useful life.
Market Value
The current price at which an asset or service can be bought or sold in the marketplace.
- Uncover and measure pertinent and superfluous cash flows in the realm of capital budgeting.
- Gauge the wholesale investment required for a project, considering tax implications.
Verified Answer
SK
Sunny Kumar7 days ago
Final Answer :
C
Explanation :
The cash flow from disposing of the old machine is calculated by considering the market value of the machine, the tax implications of the sale, and the book value of the machine. The book value is found by subtracting the accumulated depreciation from the original cost. With straight-line depreciation over 5 years, the annual depreciation is $25,000 / 5 = $5,000. After 3 years, the accumulated depreciation is $5,000 * 3 = $15,000, making the book value $25,000 - $15,000 = $10,000. Selling the machine for $15,000 results in a gain of $5,000. The tax on this gain is $5,000 * 34% = $1,700. Therefore, the net cash flow from disposal is the sale price minus the tax on the gain, which is $15,000 - $1,700 = $13,300.
Learning Objectives
- Uncover and measure pertinent and superfluous cash flows in the realm of capital budgeting.
- Gauge the wholesale investment required for a project, considering tax implications.