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.
First, we must determine the annual depreciation on the old lathe. This is found by doing the following:
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 ...
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.