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Calculating the net required investment

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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%.

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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.

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Important information about Calculating Residual Income and Return on Investment

The Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%.

Required:

a. Calculate the company's return on investment (ROI) and residual income (RI).

b. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?

c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?

d. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?

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