Question
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.
Facts
Existing Machine Proposed Machine
Cost = $100,000 Cost = $150,000
Purchased 2 years ago Installation = $20,000
Depreciation MACRS 5 years Depreciation MACRS 5 years
Current market value = $105,000
Five year usable life remaining Five year usable life expected
Earnings before Depreciation and Taxes
Existing Machine Proposed Machine
Yr 1 $160,000 Yr 1 $170,000
2 $150,000 2 $170,000
3 $140,000 3 $170,000
4 $140,000 4 $170,000
5 $140,000 5 $170,000
The firm pays 40% taxes on ordinary income and capital gains.
Calculate the tax liability from the sale of the existing asset.
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