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Computer Disk Duplicators, Inc has been considering several capital investment proposals for the year beginning in 2014
Computer Disk Duplicators, Inc has been considering several capital investment proposals for the year beginning in 2014. For each investiment proposal the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent Proposal Type of Capital Budgeting Decision Espansion Replacement Replacement Mutually Type of Project Independent Costo dewasa $2.500.000 Trailcon $15.000 MACES rew asset Se Orangerie $30 ceo $100.00 NE 111/2010 Sate pressid set $50 000 $123 vecis cesser $30,000 $3.000 5100 000 $150 See 2012
Expert Solution
calculation of initial outlay of proposal 3 is as follows.
cost of new asset (300,000).
installation charges (15,000).
proceeds from sales of old assets 120,000.
tax paid on gain from sales of old assets* (16,000)
so initial outlay of proposal 3=120,000-300,000-15,000-16,000=$(211,000).
so option b is the correct answer.
*calculation of tax paid on gain from sales of old asset is as follows.
tax paid on gain from sales of old asset = (proceeds from sales of old assets - tax basis of old asset)*tax rate
given that,
sales price of old asset=120,000.
tax rate =40%=40/100=.4.
tax basis(book value for tax purpose)=original cost of old assets - accumulated depreciation.
given that,
original cost of old assets=100,000.
we kow that 1st year MACRS(5 years) rate =20%.
so depreciation =100,000*20/100=20,000.
so tax basis=100,000-20,000=80,000.
so tax paid on gain from sales of old asset = (proceeds from sales of old assets - tax basis of old asset)*tax rate.
tax paid on gain from sales of old asset = (120,000-80,000)*.4=16,000.
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