A firm has an opportunity to invest in a new device that will replace two of the

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 and requires an additional outlay of $30,000 to cover installation and shipping. The new device will cause the firm to increase its net working capital by $20,000. Both 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 $75,000). 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. Comput the net investment for this project.

Explanation / Answer

Net cash outflow from new device =$570,000+$30,000 +$20,000= $620,000.00 Cash flow from sale of machine = proceeds from machine - tax paid Cash flow from sale of 1st machine =$100,000 -($100,000-$95,000)*40% =$98000 Cash flow from sale of 2nd machine =$150,000 -($150,000-$75,000)*40% = $120,000.00 net investment for this project=$98000+$120,000.00 -$620,000.00 == $402,000.00

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