Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____.
A)$19,600
B)$30,000
C)$33,600
D)$21,000
E)$44,000

Question

Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____. 
A)$19,600
B)$30,000
C)$33,600
D)$21,000
E)$44,000

Quizplus · Accepted Answer

The initial investment outlay for the new machine includes the cost of the new machine minus the after-tax salvage value of the old machine. The after-tax salvage value is calculated as the market value of the old machine plus the tax effect on the sale of the old machine (which is the tax on the difference between the market value and the book value). The calculation is as follows: Cost of new machine = $30,000; Market value of old machine = $14,000; Book value of old machine = $5,000; Tax on sale of old machine = (Market value - Book value) * Tax rate = ($14,000 - $5,000) * 40% = $3,600; After-tax salvage value of old machine = Market value - Tax on sale = $14,000 - $3,600 = $10,400; Initial investment outlay = Cost of new machine - After-tax salvage value of old machine = $30,000 - $10,400 = $19,600.

Tech Engineering Company Is Considering the Purchase of a New