Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200....
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Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was expected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated saivage value of $1,200. The machine can be sold for $3,500 today. Bulldog is considering the purchase of a new leather-cutting machine to replace the existing machine. The new machine costs $14,000, with an expected salvage value of $2,000 at the end of the third year. The new machine will be depreciated using the MACRS method and is considered a three-year property. There will be an increase of $1,700 in net working capital. Having the new machine will result in an increase of revenue of $13,000, but the operating costs will also increase by $6,000 for three years. Bulldog's tax rate is 40%, and cost of capital is 16%. a. Compute the depreciation for the old machine and the new machine as well as the incremental depreciation (AD) for each of the next three years. Old $11,200 7 year exp. used lour Salv. Value $1,200 Can sell for $3,500 b. What is the book value of the old machine today? $4,200 c. What is the tax consequence of the sale of the old machine today? tax savings of $280 d. What is the after-tax selling price of the old machine? $3,780 Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was expected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated saivage value of $1,200. The machine can be sold for $3,500 today. Bulldog is considering the purchase of a new leather-cutting machine to replace the existing machine. The new machine costs $14,000, with an expected salvage value of $2,000 at the end of the third year. The new machine will be depreciated using the MACRS method and is considered a three-year property. There will be an increase of $1,700 in net working capital. Having the new machine will result in an increase of revenue of $13,000, but the operating costs will also increase by $6,000 for three years. Bulldog's tax rate is 40%, and cost of capital is 16%. a. Compute the depreciation for the old machine and the new machine as well as the incremental depreciation (AD) for each of the next three years. Old $11,200 7 year exp. used lour Salv. Value $1,200 Can sell for $3,500 b. What is the book value of the old machine today? $4,200 c. What is the tax consequence of the sale of the old machine today? tax savings of $280 d. What is the after-tax selling price of the old machine? $3,780
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