QRW Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.)The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.QRW's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The initial outlay for the new machine is

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Quizplus · Accepted Answer

The initial outlay for the new machine includes the cost of the new lathe, installation costs, minus the salvage value of the old lathe, plus the additional working capital required. This is calculated as follows: Cost of new lathe ($100,000) + Installation costs ($10,000) + Additional working capital ($3,000) - Salvage value of old lathe ($2,000) = $111,000. However, the correct calculation should also consider the tax effect on the sale of the old lathe. The book value of the old lathe is $5,000, and it is sold for $2,000, resulting in a loss of $3,000. This loss can reduce the taxable income, leading to a tax shield of $3,000 * 40% = $1,200. Therefore, the initial outlay should be adjusted by this tax shield: $111,000 - $1,200 = $109,800.

QRW CorpNeeds to Replace an Old Lathe with a New,more Efficient