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 570,000 dollars and requires an additional outlay of 30,000 dollars to cover installation and shipping. The new device will require the firm to increase its net working capital by 20,000 dollars. Both the old machines can be sold, the first for 100,000 (book value equals 95,0000) and the second for $150,000 (book value equals 75,000 dollars. the original cost of the first machine was 200,000 dollars, and the original cost of the second machine was 140,000 dollars. the firms marginal tax bracket is 40 percent. Compute the net investment for this project.

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 570,000 dollars and requires an additional outlay of 30,000 dollars to cover installation and shipping. The new device will require the firm to increase its net working capital by 20,000 dollars. Both the old machines can be sold, the first for 100,000 (book value equals 95,0000) and the second for $150,000 (book value equals 75,000 dollars. the original cost of the first machine was 200,000 dollars, and the original cost of the second machine was 140,000 dollars. the firms marginal tax bracket is 40 percent. Compute the net investment for this project.

Answer 1

To compute the net investment for this project, we need to consider the cost of the new device, the additional expenses for installation and shipping, the change in net working capital, and any proceeds from selling the old machines.

1. Cost of the new device: $570,000
2. Additional expenses for installation and shipping: $30,000
3. Change in net working capital: $20,000 (increase)

Now let's calculate the proceeds from selling the old machines:

1. Proceeds from selling the first machine: $100,000 (book value is $95,000)
2. Proceeds from selling the second machine: $150,000 (book value is $75,000)

To compute the net investment, we need to subtract the proceeds from selling the old machines from the total cost of the new device and additional expenses. However, the proceeds from selling the old machines need to be adjusted for taxes.

To adjust for taxes:
1. Calculate the tax on the gain from selling the first machine:
Tax = (Sale Price - Book Value) * Tax Rate
= ($100,000 - $95,000) * 0.4 = $2,000

2. Calculate the tax on the gain from selling the second machine:
Tax = (Sale Price - Book Value) * Tax Rate
= ($150,000 - $75,000) * 0.4 = $30,000

Now let's calculate the net investment:

Net Investment = Cost of New Device + Additional Expenses + Change in Net Working Capital - Tax on Gain from Selling First Machine - Tax on Gain from Selling Second Machine

Net Investment = $570,000 + $30,000 + $20,000 - $2,000 - $30,000
Net Investment = $588,000

The net investment for this project is $588,000.