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Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost...

Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost $109,000 including delivery and installation. The old equipment to be replaced has a book value of $76,300 and can be sold pre-tax for $74,300. If the firm’s effective tax rate is 25%, compute the net investment.

$32,700

$34,700

$33,200

$34,200

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Answer #1

Option 'D' is correct

Cost of new equipment = $109,000

Less: realized value from replacement of old equipment = $74,300

Less: Tax shield = $500

Net Investment = $34,200

Computation of realized gain/loss from replacement of old equipment and tax shield

Book Value = $76,300

Less sale value = $74,300

Net loss on sale = -$2,000 Tax shield = 2000*25% = $500

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