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Calculating the net required investment

1. Assume a company will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000. The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If the firm has a current marginal tax rate of 34%, what is the net investment?

2. A company is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year and operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34% and the first year's depreciation rate is 20%, what is the net cash flow in the first year?

3. A firm purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. The firm is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the ax liability on the sale of the old machine? Assume a marginal tax rate of 40%. Use the MACRS schedule listed here: 7year MACRS depreciation schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%

4. What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40%.

Solution Summary

Solutions depict the steps to calculate the tax liability on sale of old machine and net investment required in case of replacing old machines.