JUL E CORP. IS TRYING TO DETERMINE THE INITIAL INVESTMENT REQUIRED TO REPLACE AN OLD MACHINE WITH A NEW, SPHISTICATED MODEL. THE MACHINE'S PURCHASE PRICE IS $335 000 AND AN ADDITIONAL $15 000 WILL BE REQUIRED TO INSTALL IT. IT WILL BE DEPRECIATED UNDER THE STRAIGHT-LINE METHOD WITH A 5 YEAR ESTIMATED LIFE. THE OLD MACHINE PURCHASED 3 YEARS AGO AT COST OF $180000. THE FIRM FOUND A BUYER WILLING TO PAY $220000 FOR THE OLD MACHINE AND REMOVE IT AT BUYER'S EXPENSE. THE FIRM CURRENT LIABILITIES WILL ACCOMPANY THE REPLACEMENT. THE TAX RATE IS 40%. COMPUTE FOR THE IN INITIAL INVESTMENT.
I'm no expert in accounting, but here is my take on this:
$335,000 + $15,000 =$350,000 The cost of the New Machine
But, since they found a buyer who will pay $220,000 for the Old Machine, the company presumably will have to pay 40% tax on that, or:
$220,000 - 40% =$132,000 net proceeds from the sale of the Old Machine.
$350,000 - $132,000 =$218,000 Net cost to company in its initial investment to replace the Old Machine with the new one.
