Consider r the following replacement decision problem: • Option 1: Continue to use the old machine: A machine now in use, which was bought five years ago for $5.000. has been fully depreciated. It can be sold for $3,000. but could be used for three more years (remaining useful life), al the end of which lime it would have no salvage value. The annual operating and maintenance costs for the old machine amount to $12,00. • Option 2: Re place the old machine: A new machine can be purchased at an invoice price of $ 15.000 to replace the present equipment. Because of the nature of the manufactured product, the new machine has an expected economy life of three years, and it will have no salvage value at the end or that time. The new machine's expected operating and maintenance costs amount lo $2,500 for the first year and $3,500 for each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $1.500 during the first year. and $2.600 per year for the next two years. The firm's interest rate is 12%. If the old machine is to be sold now what will be the gain tax?

Consider r the following replacement decision problem: • Option 1: Continue to use the old machine: A machine now in use, which was bought five years ago for $5.000. has been fully depreciated. It can be sold for $3,000. but could be used for three more years (remaining useful life), al the end of which lime it would have no salvage value. The annual operating and maintenance costs for the old machine amount to $12,00. • Option 2: Re place the old machine: A new machine can be purchased at an invoice price of $ 15.000 to replace the present equipment. Because of the nature of the manufactured product, the new machine has an expected economy life of three years, and it will have no salvage value at the end or that time. The new machine's expected operating and maintenance costs amount lo $2,500 for the first year and $3,500 for each of the next two years. The income tax rate is 35%. Any gains will also be taxed at 35%. The allowed depreciation amounts for the new machine are $1.500 during the first year. and $2.600 per year for the next two years. The firm's interest rate is 12%. If the old machine is to be sold now what will be the gain tax?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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