A firm is exploring the possibility of engaging in a new capital project. A salvage company is offering the him more for its old equipment than the equipment's book value. If the firm accepts the salvage company's offer, the reduction to the net initial investment in the project will be?
Since the salvage company's offer is for more than the book value of the equipment, an accrual- basis gain would result A loss on disposal of old equipment results in a tax benefit, since the loss reduces accrual basis income. Therefore, a gain. which increases accrual-basis income, results in a tax detriment, and the reduction to the net initial investment will be less than if the salvage company's offer had resulted in a loss.