Reference no: EM131777653

Initial investment: Basic calculation

Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an installed cost of $20,000; it was being depreciated under MACRS using a 5-year recovery period. (See Table 4.2 on page 120 for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,000 and requires $5,000 in installation costs; it will be depreciated using a 5-year recovery period under MACRS. The existing machine can currently be sold for $25,000 without incurring any removal or cleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

Cost of new asset -                               $35,000

Installation costs -                                +$ 5,000

Total installed cost -                                         $40,000

Proceeds from sale of old asset             $25,000

Tax on sale of old asset                       +          $ 7,680

Total after-tax proceeds                                    $17,320

Initial Invesment                                              $22,680

Could you please tell me how the tax on sale of old asset was figured?