A four-year-old asset is to be replaced as part of a capital project. It originally cost $20,000 and has a depreciation (straight line)life of ten years. Its market value is currently $16,000. The firm's marginal tax rate is 34%. What is its contribution to the initial outlay?
A)$ 2,880
B)$14,640
C)$14,880
D)$ 2,640

Question

Quizplus · Accepted Answer

The book value of the asset is $12,000 ($20,000 - 4 years * $2,000 depreciation per year). The gain on sale is $4,000 ($16,000 market value - $12,000 book value). The tax on the gain is $1,360 ($4,000 * 34%). The contribution to the initial outlay is $16,000 - $1,360 = $14,640.

A Four-Year-Old Asset Is to Be Replaced as Part of a Capital