Table 11.3 Cuda Marine Engines, Inc. Must Develop the Relevant Cash Flows

question 55

Multiple Choice

Table 11.3
Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
-The tax effect on the sale of the existing asset results in ________. (See Table 11.3)

• A) $800 tax benefit
• B) $1,000 tax liability
• C) $1,100 tax liability
• D) $6,000 tax liability

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