Question
You have a company that provides teachers for college students. Currently, it only provides these services for Japanese classes; however, you are thinking of starting
You have a company that provides teachers for college students. Currently, it only provides these services for Japanese classes; however, you are thinking of starting the tutoring service for this finance class. After a long market study which you spent $5,000 to conduct, you figured out that your company will experience an increase in annual revenues by $50,000. Since you have to hire new teachers, the annual cost will also increase by $10,000.
The old equipment you have for the teachers has a $6,000 market value if sold today, which is fully depreciated to a book value of $10,000. The new, high-tech equipment will cost you $100,000. Additionally, you will pay shipping fees of $10,000. The new equipment will be depreciated via a 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The estimated realized salvage value of the new equipment is $20,000. If the firm buys the new equipment, you will need to invest $30,000 in working capital which will be fully recovered at the end of the project. You have a 10% cost of capital and a tax rate of 40%.
What is the tax implication of selling the old machine?
a) There is no tax effect.
b) Tax shield of $1,600.
c) Tax liabilities of $1,600.
d) Tax shield of $4,000.
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