What is the tax effect of selling the old machine

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Reference no: EM13300678

This is a sample question so I have the answer but I need to know the method of getting to the answer. I am not getting to the correct number. Please give detailed very simplified explanation using a financial calculator, calculator or Excel spreadsheet so that I understand how to do this please.

Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when purchased 5 years ago and is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold for $5,000 today. The new van has an invoice price of $75,000 and will cost an additional $5,000 to modify it to carry the company's products. Cost savings from the use of the new van are expected to be $22,000 per year for 5 years at which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company's tax rate is 35%/ Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine?

Reference no: EM13300678

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