question archive 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
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