Answer (A) is correct . The net initial investment is increased by the proceeds from disposal of old equipment. If the salvage company’s offer exceeds the carrying amount of the equipment, an accrual-basis gain results. A loss on disposal provides a tax benefit because it reduces accrual-basis income. A gain, which increases accrual-basis income, results in a tax detriment. Thus, the net initial investment is less if the $800,000 offer exceeds the carrying amount.
Answer (B) is incorrect because A gain results in a lower after-tax inflow than a loss, and the initial net investment will be lower.
Answer (C) is incorrect because A gain on disposal and a loss on disposal have opposite effects on the net initial investment. A?gain results in a lower after-tax inflow than a loss, and the initial net investment will be lower.
Answer (D) is incorrect because The correct answer can be determined from the information given. A?gain results in a lower after-tax inflow than a loss, and the initial net investment will be lower.
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