Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one. The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training. It will be depreciated using simplified straight line depreciation over five years.
The new machine operates much faster than the old machine and with better quality. Consequently, sales are expected to increase by $2,100 per year for the next five years. While it is faster, it is fully automated and will result in increased electricity costs for the firm by $700 per year. It will, however, save about $850 per year in labor costs.
The old machine is 20 years old and has already been fully depreciated. If the firm's marginal tax rate is 28%, compute the after tax incremental cash flows for the new machine for years 1 through 5.
A) $2,698
B) $450
C) $2,124
D) $1,620
National Geographic is replacing an old printing press with a new one. The old press is being sold for $350,000 and it has a net book value of $75,000. Assume that National Geographic is in the 40% income tax bracket. How much will National Geographic pay in income taxes from the sale?
A) $140,000
B) $45,000
C) $110,000
D) $87,010
The relevant depreciation expense for a replacement investment is the difference between depreciation on the new asset(s) and the old asset(s).
Answer: TRUE
The salvage value of equipment should not be considered when replacing it with new equipment.
Answer: FALSE
When replacing old assets with new assets, it is safe to assume that working capital requirements will remain the same.
The original cost and expected life of old assets are critical considerations in replacement decisions.
Answer: FALSE
Taxes may have a significant effect on the cost of replacing an old asset with a new asset.
Answer: TRUE
