CHAPTER 13
OTHER ISSUES IN CAPITAL BUDGETING
13-1
(a)
Annual depreciation charges are $2,000 or ($20,000/10). Thus, the book value of
the old machine is $10,000 or ($2,000 x 5 years).
(b)
Book value of old machine
$10,000
Less: market value of old machine
6,000
Operating loss due to sale
$ 4,000
x Tax rate
x
0.40
Tax savings
$ 1,600
Book value of old machine
$10,000
Less:
market value of old machine
6,000
tax savings
1,600
Sunk cost
$ 2,400
13-2
(a)
$2,000 (1 - .46)
=
$1,080
(b)
If the machine is sold before it is fully depreciated, the tax treatment is different.
Initial cost of the machine
$14,000
Less: accumulated depreciation
4,000
Book value of the machine
$10,000
Market value of the machine $13,000
Less: book value of the machine
10,000
Taxable gain
$ 3,000
Less: taxes at 46%
1,380
Gain after taxes
$ 1,620
(c)
If the machine is sold for more than its initial cost, some of the gain is subject to
the capital gains tax treatment. Because the machine was sold for $15,000, the
total gain would be $5,000 or ($15,000 - $10,000). The gain over the initial cost
of the machine or $1,000 ($15,000 - $14,000) is subject to the capital gains tax,
while the remaining $4,000 ($14,000 - $10,000) is taxed at the regular tax rate of
46%.
Market value of the machine $15,000
Less: book value of the machine
10,000
Gain
$ 5,000
Market value of the machine $15,000
Less: capital gains tax ($1,000 x 0.28)
280
regular tax ($4,000 x 0.46)
1,840
Net cash proceeds
$12,880