Your Company Is Considering the Replacement of an Old Delivery

question 128

Multiple Choice

Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.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 $5,000 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?

• A) a savings of $2,800
• B) a savings of $2,450
• C) additional taxes paid of $2,450
• D) a tax savings of $1,400

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Definitions:

Dependent Variable

The variable in a study or experiment that is expected to change in response to changes in the independent variable.

Floating

In sociological terms, refers to a state of being detached from traditional societal, cultural, or employment anchors.

Spuriousness

A situation in statistical analysis where a perceived correlation or association between two variables is actually caused by a third variable.

Correlation

A measure of how strongly two variables are related to each other.