Question

On January 1, 2018 Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000 (net of selling costs) will continue to generate the same operating revenues as the old asset ($200,000 per year), However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year Crane is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%): Year 2018 2019 2020 2021 PV of $1 at 14% 0.877 0.769 0.675 0.592 PV of Si Annuity at ¡4% MACRS 33% 458 15% 78 0.877 1.647 2.322 2.914 The discounted net-of-tax amount that should be factored into Crane Company's analysis for the disposal of the old asset (roun to the nearest whole dollar) is: ded

Answer 1

Option-(b): $68,000 Workings: $80,000 Old equipment's tax basis Old equipment's sale value Loss on sale of old equip. Tax rate $60,000_[Given] $20,000 [$60,000 $80,000] 40% Old Equipment's after-tax sale value $68,000 [$60,000+($20,000 x 40%)] >As there is a loss, firm can avail tax credit on loss on sale of old equip. and so tax credit is added with sale value.