This year Corporation EF decides to replace old outmoded business
This year, Corporation EF decides to replace old, outmoded business equipment (adjusted basis $50,000) with new, improved equipment. The corporation has two options:
• Sell the old equipment for $120,000 cash and use the cash to purchase the new equipment. This option has no transaction cost.
• Exchange the old equipment for the new like-kind equipment. This exchange has a $6,000 transaction cost that EF could deduct in the current year.
The new equipment has a MACRS recovery period of five years, and EF will use the half-year convention. EF cannot make a Section 179 election for the cost of the new equipment. Which option should EF choose? In making your computations, assume a 35 percent tax rate and a 6 percent discount rate.
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