Question

mideque, inc. is considering a project to produce pens. assume that this is a replacement project. the old equipment can be sold for $10,854 as of today. it was bought five years ago for $21,933 and is assumed to last for five more years with no salvage value at the end of its life. the initial cost of the new equipment, including transportation, installation and so forth, will be $23,355. mideque also estimates that this new equipment will save the company $2925 per year in operating costs and increase the revenues (sales) by $1490 per year over the five-year life of the project. mideque will finance $8390 by loan with an interest rate of 11% per year. the loan will be repaid at the rate of $1899 per year plus interest on the remaining balance each year. mideque uses straight-line depreciation, and the new equipment will have no salvage value at the end of its 5-year life. assume a corporate-profits tax rate of 57% a capital-gain tax rate of 41%. compute the initial investment.

Answer 1

Calculation of initial investment  
cost of machine   -23355
  
Sale proceeds of old machine   10854
Tax on old machine   -4450.14
(10854*41%)  

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Intial investment =   -16951.14

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Note: full value has been depreciated as Machine has been usee for 5 years. So Capital gain of $10854 will be taxable @41%. Tax shall be paid on it.