Problem:
A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period.
Requirement:
Question: If the assumed tax rate is 40% on ordinary income and capital gains, what is the initial investment?
A. $52,440
B. $54,240
C. $50,000
D. $42,000
Note: Provide support for rationale.