J-Bar Company Net Investment Required to Purchase a New Lathe
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Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15 year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.
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Solution Summary
This solution provides step-by-step calculations for depreciation, the adjusted basis for the old lathe, net gain if the old lathe is sold and additional investment needed for the new lathe.
Solution Preview
First, we must determine the annual depreciation on the old lathe. This is found by doing the following:
Cost $250,000
Salvage Value 25,000
Depreciable Basis $225,000 ($250,000-$25,000)
Useful Life (Years) 15
Annual Depreciation $ 15,000 ($225,000/15 Years)
Ten years ...
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