2) What is the net equipment cost, given the following, when a new piece of equipment...
2) What is the net equipment cost, given the following, when a new piece of equipment replaces an old one:
Old equipment sells for $125,000
Book value of old equipment 22,000
TaxRate 40%
New equipment cost 800,000
Site survey 18,000
Installation cost 20,000
Homework Answers
Solution:-
Step 1: Calculation of proceeds from selling old equipment:
Capital gain tax on sale= (Sale consideration-book value)*40% = (125,000-22,000)*40%= $41,200
Proceeds from sale= Sale consideration- capital gain tax = $125,000-$41,200 = $83,800
Step 2: Calculation of gross cash outflow on purchase of new equipment
Gross cash outflow= New equipment cost + Site survey + Installation cost
Gross cash outflow= 800,000 + 18,000 + 20,000 = $838,000
Step 3: Calculation of net equipment cost
Net equipment cost= Gross cash outflow for new equipment - proceeds from sale of old equipment
Net equipment cost= $838,000 - $83,800 = $754,200
Thus, the net equipment cost is $754,200 for the buyer.
Please feel free to ask any doubts in the comments section.
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