A $63,000 machine with a 7-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $75,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project?
Answer : initial outlay for the project = $ 26,700
Working notes for the above answer is as under
| Prasent value of old machine | |
| Old machine price | 63000 |
| Less : | |
| Depriciation Year 1 | -9000 |
| Depriciation Year 2 | -9000 |
| Prasent value of old machine | 45000 |
| Gain On sale = 50000-45000 | 5000 |
| Tax @ 34% on sales | 1700 |
| Old machine price | 63000 |
| Life of Machine | 7 year |
| Depriciation = 63000 / 7 year | 9000 |
| New Machine cost | -75000 |
| Less: | |
| Salvage value of prasent Macine | 50,000 |
| Net cash out flow | -25,000 |
| Add : Tax paid on gain | -1,700 |
| Total Cash Out flow | -26,700 |
initial outlay for the project = $ 26,700
