Problems
Economics/Finance

Replacement Review

1. You bought a machine five years ago for $5000. It has been depreciated with the straight line method assuming a tax life of 10 years and zero tax salvage. What is the book value of the machine at this time?

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2. You are considering replacing the machine of problem 1 with a new one. You could sell the old machine at this time for $4000. Without considering taxes, what is the investment value you should attach to the old machine for an economic analysis?

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3. Add a capital gains tax of 20% to the situation described in problems 1 and 2. What is the investment for the defender in a replacement analysis?

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4. With the situation of problem 2 and a capital gains tax of 20% assume that the old machine was now worthless because of technological advances. What is the investment in the old machine for a replacement analysis?

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5. A ten year old machine is being considered for replacement. The machine has no market value at present. Maintenance expenses are expected to increase with each succeeding year. What is the economic life of the machine?

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6. We are thinking of buying a new asset to replace an old one. The book value of the asset is $4000. We can sell the asset for $2000, but we must pay $1000 to fix it up before sale. The tax rate is 20%. What is the investment we should use for the old asset in the replacement analysis?

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Problems
Economics/Finance