Question

The tri-star company currently use an old lathe that was purchase 2 years ago at $6000. This machine is being depreciatin on a MACRS five year (20%, 32%, 19%, 12%, 11%, 6%). The current market value for this machine is $3,000. The proposed new improved lathe cost $10,000 and additional installation fee of $1,000. The new lathe would require that inventories be increased by $800 and account receivable increase $600, but accounts payable would simultaneously increase by $700. Tri-Star's marginal federal-plus-state tax rate is 30%. What is the initial investment of company when evaluating the replacement of old lathe by the new one?

Answer 1

$8,736

Step-by-step explanation:

initial investment = capital expenditures (machine's purchase cost + installation costs) + any increase in working capital - disposal of old machine

capital expenditures = $10,000 + $1,000 = $11,000

after tax salvage value = market value + taxes on disposal

the current book value of the old machine = $6,000 - $1,200 - $1,920 = $2,880

taxes on salvage value = (book value - market value) x tax rate = ($2,880 - $3,000) x 30% = -$36

after tax salvage value = $3,000 - $36 = $2,964

net working capital = current liabilities - current assets

change in working capital = $800 + $600 - $700 = $700

initial investment = $11,000 + $700 - $2,964 = $8,736