Cuda Marine Engines, Inc

Multiple Choice

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 is from the same CCA pool as the existing asset and will be depreciated using a 20% CCA rate. The existing equipment, which originally cost $25,000 and will be sold for
$10,000, has been depreciated for three years. 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

A) a $4,400 recapture creating a tax liability.
B) a $2,200 capital loss that can be written off against future capital gains.
C) a $4,400 terminal loss being claimed.
D) no tax liability since the assets are pooled.