CMA Study Group

Regal Industries is replacing a grinder purchased 5 years ago for $15,000
with a new one costing $25,000 cash. the original grinder is being depreciated

on a  straigh-line basis over 10 years to a zero salvage value. assuming a 40%

marginal tax rate, Regal's net cash investment at the time of purchase if the

old grinder is sold and the new one is purchase is? 

obviously, initial cash outlow is $25,000,and there is the cash inflow of $6,000.

but I don't know why we  should compute the savings from loss(cash inflow),

which is (10,000carrying amount-6000 cash received)*40%=1600. is the $1600 a cash revieved from tax authorities?
if the salvage value is 11,000,how do we compute the net cash flow?

Dear Xiaohu Li,

Al thought your question is not complete i.e. $6,000 cash realised on sale, $10,000 carrying amount etc. my assumptions are below:

They deduct $1,600 because this loss to be charged to P&L account. When the loss of $4,000 charged to P&L, N/P will reduced by that amount and tax obligation would be $1,600 less. IF the cash realised by sale is $ 11,000, then cash inflow will be $10,600 because 40% gain of $1,000 would be taxable, so have to deduct from $11,000.

Regards,

Bhaskar