Old Machine Sold at a Gain

3
. Regal Industries is replacing a
grinder purchased 5 years ago for
$15,000 with a new one
costing $25,000 cash. The original
grinder is being depreciated on a
straight-line basis over
15 years to a zero salvage value.
Regal will sell this old equipment
to a third party for $6,000
cash. The new equipment will be
depreciated on a straight-line basis
over 10 years to a zero
salvage value. Assuming a 40%
marginal tax rate, Regal’s net cash
investment at the time of
purchase if the old grinder is sold
and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292
4-9
4
. A machine that cost $50,000 and
is fully depreciated is sold for
$10,000. The $10,000 is then
used as a down payment on the
purchase of a new machine costing
$75,000. Assuming a
40% tax rate, the out-of-pocket
cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Equipment Sold at a Loss
*. In making a decision to invest in
a project the cash flow should be
adjusted for their tax effect.
Assume an income tax rate of 35%
an old machine with a book value
of P70,000 will be
replaced by a new machine costing
P150,000. The market value of
the old machine is
P50,000. The after tax investment
outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA
1085
*. In deciding the investment in a
project, cash flows should be
adjusted for their tax effect.
Assume an income tax rate of
35%. An old equipment with a
book value of P15,000 will be
replaced by a new equipment
costing P50,000. The market
value of the old equipment is
P11,000. The after-tax investment
outlay is (E)
a. P34,400 c. P39,000
b. P37,600 d. P40,400 RPCPA
0581
Old Equipment Sold at a Loss,
Additional Working Capital
*. Diliman Republic Publishers,
Inc. is considering replacing an old
press that cost P800,000 six
years ago with a new one that
would cost P2,250,000. Shipping
and installation would cost an
additional P200,000. The old
press has a book value of P150,000
and could be sold currently
for P50,000. The increased
production of the new press
would increase inventories by
P40,000, accounts receivable by
P160,000 and accounts payable
by P140,000. Diliman
Republic’s net initial investment
for analyzing the acquisition of the
new press assuming a 35%
income tax rate would be (D)
a. P2,450,000 c. P2,600,000
b. P2,425,000 d. P2,250,000
RPCPA 0595
44. Superstrut is considering
replacing an old press that cost
$80,000 six years ago with a new
one that would cost $245,000. The
old press has a net book value of
$15,000 and could be
sold for $5,000. The increased
production of the new press would
require an investment in
additional working capital of
$6,000. The company's tax
rate is 40%. Superstrut's net
investment now in the project
would be: (M)
a. $256,000. c. $250,000.
b. $242,000. d. $245,000. CMA
adapted
Old Machine Sold at a Loss, Cash
Cost Savings on New Machine
5
. A company is considering
replacing existing 2-year-old
equipment. This project will
require a
discounted cash flow analysis to
determine if the benefits exceed
the costs. Year-end data
regarding the existing and new
equipment are shown below.
Existing Equipment New
Equipment
Original cost $600,000 $540,000
Useful life (in years) 5 3
Remaining life (in years) 3 3
Annual depreciation $120,000
$180,000
Accumulated depreciation
$240,000 N/A*
Book value $360,000 N/A*
Current cash disposal value
$100,000 N/A*
* Value is not applicable here.
The new equipment will result in
cash operating cost savings of
$150,000 annually, before
taxes. The new equipment would
be purchased late in the current
year to be operational at the
beginning of the first year of the
project. The existing equipment
would be sold early in the first
year of the project, meaning no
further depreciation would be
taken on it. The company has a
Old Machine Sold at a Gain
3
. Regal Industries is replacing a
grinder purchased 5 years ago for
$15,000 with a new one
costing $25,000 cash. The original
grinder is being depreciated on a
straight-line basis over
15 years to a zero salvage value.
Regal will sell this old equipment
to a third party for $6,000
cash. The new equipment will be
depreciated on a straight-line basis
over 10 years to a zero
salvage value. Assuming a 40%
marginal tax rate, Regal’s net cash
investment at the time of
purchase if the old grinder is sold
and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292
4-9
4
. A machine that cost $50,000 and
is fully depreciated is sold for
$10,000. The $10,000 is then
used as a down payment on the
purchase of a new machine costing
$75,000. Assuming a
40% tax rate, the out-of-pocket
cost of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C & U
Old Equipment Sold at a Loss
*. In making a decision to invest in
a project the cash flow should be
adjusted for their tax effect.
Assume an income tax rate of 35%
an old machine with a book value
of P70,000 will be
replaced by a new machine costing
P150,000. The market value of
the old machine is
P50,000. The after tax investment
outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA
1085
*. In deciding the investment in a
project, cash flows should be
adjusted for their tax effect.
Assume an income tax rate of
35%. An old equipment with a
book value of P15,000 will be
replaced by a new equipment
costing P50,000. The market
value of the old equipment is
P11,000. The after-tax investment
outlay is (E)
a. P34,400 c. P39,000
b. P37,600 d. P40,400 RPCPA
0581
Old Equipment Sold at a Loss,
Additional Working Capital
*. Diliman Republic Publishers,
Inc. is considering replacing an old
press that cost P800,000 six
years ago with a new one that
would cost P2,250,000. Shipping
and installation would cost an
additional P200,000. The old
press has a book value of P150,000
and could be sold currently
for P50,000. The increased
production of the new press
would increase inventories by
P40,000, accounts receivable by
P160,000 and accounts payable
by P140,000. Diliman
Republic’s net initial investment
for analyzing the acquisition of the
new press assuming a 35%
income tax rate would be (D)
a. P2,450,000 c. P2,600,000
b. P2,425,000 d. P2,250,000
RPCPA 0595
44. Superstrut is considering
replacing an old press that cost
$80,000 six years ago with a new
one that would cost $245,000. The
old press has a net book value of
$15,000 and could be
sold for $5,000. The increased
production of the new press would
require an investment in
additional working capital of
$6,000. The company's tax
rate is 40%. Superstrut's net
investment now in the project
would be: (M)
a. $256,000. c. $250,000.
b. $242,000. d. $245,000. CMA
adapted
Old Machine Sold at a Loss, Cash
Cost Savings on New Machine
5
. A company is considering
replacing existing 2-year-old
equipment. This project will
require a
discounted cash flow analysis to
determine if the benefits exceed
the costs. Year-end data
regarding the existing and new
equipment are shown below.
Existing Equipment New
Equipment
Original cost $600,000 $540,000
Useful life (in years) 5 3
Remaining life (in years) 3 3
Annual depreciation $120,000
$180,000
Accumulated depreciation
$240,000 N/A*
Book value $360,000 N/A*
Current cash disposal value
$100,000 N/A*
* Value is not applicable here.
The new equipment will result in
cash operating cost savings of
$150,000 annually, before
taxes. The new equipment would
be purchased late in the current
year to be operational at the
beginning of the first year of the
project. The existing equipment
would be sold early in the first
year of the project, meaning no
further depreciation would be
taken on it. The company has a
Acme is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its useful life.
Straight-line depreciation of $25,000 annually is available. The machine has a current market value of $100,000.
What is the cash flow from selling the machine if the tax rate 40%.
a. $25,000 c. $92,000
b. $80,000 d. $100,000 D, L & H 9e

42. Acme is considering the sale of a machine with a book value of $160,000 and 3 years remaining in its useful life.
Straight-line depreciation of $50,000 annually is available. The machine has a current market value of $200,000.
What is the cash flow from selling the machine if the tax rate is 40%?
 a. $50,000 c. $184,000
b. $160,000 d. $200,000 L & H 10e

i
. A corporation with a taxable income of $200,000 and a 40 percent tax rate is considering the sale of an asset.
The original cost of the asset is $10,000, with $6,000 of its depreciated. How much total after-tax cash will be
produced from the sale of the asset for $12,000?
a. $10,400 d. $(3,200)
b. $12,000 e. $8,800
c. $11,200 H&M

Initial Net Cash Investment

After Tax Cash Inflow of Sale of Old Machine at a Gain
36. Eyring Industries has a truck purchased seven years ago at a cost of $6,000. At the time of purchase, the
ultimate salvage value was estimated at $500, but salvage value was ignored in depreciation deductions. The
truck is now fully depreciated. Assuming a tax rate of 40%, if the truck is sold for $500, the after-tax cash inflow
for capital budgeting purposes will be: (E)
a. $500. c. $200.
b. $300. d. $100. G & N 9e

Old Machine Sold at Book Value

50. Hatchet Company is considering replacing a machine with a book value of $400,000, a remaining useful life of 5
years, and annual straight-line depreciation of $80,000. The existing machine has a current market value of
$400,000. The replacement machine would cost $550,000, have a 5-year life, and save $75,000 per year in
cash operating costs. If the replacement machine would be depreciated using the straight-line method and the
tax rate is 40%, what would be the net investment required to replace the existing machine? (D)
a. $90,000. c. $330,000
b. $150,000 d. $550,000 D, L & H 9e

56. Big City Motors is trying to decide whether it should keep its existing car washing machine or purchase a new
one that has technological advantages (which translate into cost savings) over the existing machine. Information
on each machine follows:
Old machine New machine

Original cost $9,000 $20,000

Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years  500 1,000
Remaining life 10 yrs. 10 yrs.

The incremental cost to purchase the new machine is

 a. $11,000. c. $13,000.
b. $20,000. d. $18,000. Barfields

Old Machine Sold at a Gain

ii
. Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25,000 cash.
The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value. Regal
will sell this old equipment to a third party for $6,000 cash. The new equipment will be depreciated on a straight-
line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal’s net cash
investment at the time of purchase if the old grinder is sold and the new one is purchased is
a. $19,000 c. $17,400
b. $15,000 d. $25,000 CMA 1292 4-9

iii
. A machine that cost $50,000 and is fully depreciated is sold for $10,000. The $10,000 is then used as a down
payment on the purchase of a new machine costing $75,000. Assuming a 40% tax rate, the out-of-pocket cost
of the new machine is:
A. $75,000 C. $65,000
B. $71,000 D. $69,000 C&U

Old Equipment Sold at a Loss

*. In making a decision to invest in a project the cash flow should be adjusted for their tax effect. Assume an
income tax rate of 35% an old machine with a book value of P70,000 will be replaced by a new machine costing
P150,000. The market value of the old machine is P50,000. The after tax investment outlay is (E)
a. P82,500 c. P107,000
b. P93,000 d. P135,000 RPCPA 1085

*. In deciding the investment in a project, cash flows should be adjusted for their tax effect. Assume an income tax
rate of 35%. An old equipment with a book value of P15,000 will be replaced by a new equipment costing
P50,000. The market value of the old equipment is P11,000. The after-tax investment outlay is (E)
a. P34,400 c. P39,000
i
.Taxes = ($12,000 - $4,000) x 0.40 = $3,200
Cash flow = $12,000 - $3,200 = $8,800
ii
.Answer (C) is correct. The old machine has a book value of $10,000 [$15,000 cost - 5($15,000 cost ÷ 15 years)
depreciation]. The loss on the sale is $4,000 ($10,000 - $6,000 cash received), and the tax savings from the loss is
$1,600 (40% x $4,000). Thus, total inflows are $7,600. The only outflow is the $25,000 purchase price of the new
machine. The net cash investment is therefore $17,400 ($25,000 - $7,600).
Answer (A) is incorrect because $19,000 overlooks the tax savings from the loss on the old machine. Answer (B) is
incorrect because $15,000 is obtained by deducting the old book value from the purchase price. Answer (D) is incorrect
because the net investment is less than $25,000 given sales proceeds from the old machine and the tax savings.

iii

Cost of new machine $75,000

Less: After-tax inflow from old machine ($10,000 x .60) 6,000

$69,000