# Calculating the net initial investment

A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is:

A) $42,000.

B) $52,440.

C) $54,240.

D) $50,000.

14. Compute the initial purchase price for an asset with book value of $34,800 and total accumulated depreciation of $85,200.

15. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is

A) $48,560.

B) $44,360.

C) $49,240.

D) $27,600.

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#### Solution Preview

13. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is

Depreciation rate for year 1=20%

Depreciation rate for year 1=32%

Accumulated ...

#### Solution Summary

The solution depict the steps to estimate the initial investments in the given cases.

Calculating net investment, net cash flows and net present value

1. Find the Net Investment for both options. Which option is more attractive based solely on this evaluation?

2. Calculate the Net Cash Flows for both options. Which option is more attractive based solely on this evaluation?

3. Briefly explain the reasons for any difference in your answer in question 1 and question 2 or why both support the same option.

4. Find the Net Present Value of each investment.

5. Which investment would Bob most likely recommend given his recommendation to use the Net Present Value method? Why?

6. Why would Bob tell Joe and Mary not to base their comparison on the future values of the cash flows, as they were intuitively doing before they went to see him?

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