XYZ would like to purchase a new machine. It will cost $50,000. Shipping and ins

Question

XYZ would like to purchase a new machine. It will cost $50,000. Shipping and installation charges for the equipment are expected to total $5,000. This equipment will be depreciated using straight line for its 5 year economic life to an estimated salvage value of zero. In order to use this equipment, XYZ estimates it will have to add $7,000 initially to its net working capital. If the machine is purchased, it will replace a machine with a book value of $10,000, the old machine can be sold for $25,000. During the first year of operations, the company expects total revenues to increase by $50,000, and from years 2 to 5 increase by $60,000 per year The incremental operating expense is expected to be $10,000 in the first year and increase each year by 5%. The marginal tax rate is 40%. Find the initial outlay/net investment.

Explanation / Answer

The following is the calcualtion of Initial outlay / net investment:

note:

sale proceeds of old machine:

Cost price of machine $50,000 add: shipping and installation cost 5,000 Add: Net working capital 7,000 Less: Sale proceeds of old machine (net off tax) (see note) (19,000) Inital outlay/ net investment $43,000

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