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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 $540,000 and requires an additional outlay of $10,000 to cover installation and shipping. The new device will cause the firm to increase its net working capital by $30,000. Both of the old machines can be sold—the first for $100,000 (book value equals $95,000) and the second for $150,000 (book value equals $140,000). The original cost of the first machine was $200,000, and the original cost of the second machine was $140,000. The firm’s marginal tax bracket is 40 percent. Compute the net investment for this project. Round your answer to the nearest dollar.
To compute the net investment for this project, you need to add up all the costs associated with the new device and subtract the amount received from selling the old machines.
Here's the breakdown of the costs:
1. Cost of the new device: $540,000
2. Cost of installation and shipping: $10,000
3. Increase in net working capital: $30,000
So the total costs are:
$540,000 + $10,000 + $30,000 = $580,000
Now let's calculate the amount received from selling the old machines:
1. Sale price of the first machine: $100,000
2. Book value of the first machine: $95,000
The gain from selling the first machine is:
$100,000 - $95,000 = $5,000
3. Sale price of the second machine: $150,000
4. Book value of the second machine: $140,000
The gain from selling the second machine is:
$150,000 - $140,000 = $10,000
Now, let's calculate the net investment:
Net Investment = Total costs - Gain from selling old machines
Net Investment = $580,000 - ($5,000 + $10,000)
Net Investment = $580,000 - $15,000
Net Investment = $565,000
So, the net investment for this project is $565,000.