question archive Nuff Folding Box Company, Inc

Nuff Folding Box Company, Inc

Subject:FinancePrice:3.87 Bought7

Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains. 

 

 

The tax effect of the sale of the existing asset is ________. (See Table 11.5)

a tax liability of $2,340

a tax liability of $3,320

a tax liability of $5,320

a tax benefit of $1,500

 

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Answer

A tax liability of $5,320

Step-by-step explanation

Gain / Loss on sale = Selling price - Book value

Book value = Cost - Accumulated depreciatio

Based on the MACRS using a five-year recovery schedule, the accumulated depreciation = $10 000 * (0.20 + 0.32 + 0.19+0.12) = 10 000* 0.83 =$8300

Book Value = 10000-8300=1700

Gain / Loss on sale = Selling price - Book value = 15 000-1700=13300

The tax effect of the sale of the existing asset = 13 300 * Tax rate 40%

= tax liability of $5,320