Question

A firm has an opportunity to invest in a new device that will replace two of the firm’s older machines. The new device costs $530,000 and requires an additional outlay of $40,000 to cover installation and shipping. The new device will cause the firm to increase its net working capital by $10,000. Both of the old machines can be sold—the first for $120,000 (book value equals $105,000) and the second for $130,000 (book value equals $95,000). The original cost of the first machine was $220,000, and the original cost of the second machine was $120,000. The firm’s marginal tax bracket is 40 percent. Compute the net investment for this project. Round your answer to the nearest dollar. $

Answer 1

Answer:-

Net investment for the project = $350,000

..

Explanations:-

Net investment for the project = cost of new machine - after tax sale value of old machines

Cost of new machine

Cost of new machine = New device cost + Installation & shipping cost + increase in working capital

= $530,000 + $40,000 + $10,000

Cost of new machine = $580,000

After tax value of old machines

Machine 1 ;-

Book value = $105000

Sale value = $120,000

Profit = $15,000

After tax amount of profit = $15000 × (1 - 0.40)

   = $15000 × 0.60 =$9000

after tax sale value of machine 1 = book value of machine + after tax amount of profit

= $105000 + $9000

   = $114,000

Machine 2 ;-

Book value = $95,000

Sale value = $130,000

Profit = $35,000

After tax amount of profit = $35000 × (1 - 0.40)

   = $35000 × 0.60 =$21000

after tax sale value of machine 1 = book value of machine + after tax amount of profit

= $95,000 + $21,000

   =$116,000

.

Net investment for the project = cost of new machine - after tax sale value of old machines

= $580,000 - ($114,000 + $116,000)

= $580,000 - $230,000

Net investment for the project = $350,000