A profitable Co is considering the replacement of old equipment used in the manufacturing process with new, more efficient equipment. An analyst gather the following info: OLD EQUIPMENT: Original cost: $40,000 Current book value: 10,000 Current market value: 15,000 Est. salvage value in 3 years: 2,500 Cost of new equipment (inc. freight & installation cost of $3,000): $83,000 Marginal tax rate for the Co: 40% Increase in Net Working Capital required: 5,500 If the new equipment is purchased, the old machine will be sold to another company. The initial (net) investment outlay for the replacement project is closest to: A. $71,500 B. $73,000 C. $73,500 D. $75,500 Anyone please show me your calculation.
I’m going with C. 83k + 5500 - 15k = 73500 dont think the gain plays into it
I’d go with C as well, its seems like a Purchase of PPE $83,000 Sale of PPE $15,000 Increase in capital (cash outflow) 5,500 so 83000 - 15000 + 5500 = 73,500
Would it be A? 71500 As above 73500, and on the equipment sold – there was a capital gains of 5000 ( 15000 - 10000). So you would pay tax of 5000 * .4 = 2000 on it. So After tax 73500 - 2000 = 71500. Choice A
it is D sale of old equipment 15000 (cash)-2000(taxes paid (15000-10000)*40%)=13000 new equipment outflow of 83000+5500=88500 total 75500
I agree with florinpop
I think it’s D. Because the firm has to pay tax on the capital gain of $ 5000. So, the actual cash inflow will be 10000+ 0.6* 5000 = 13000. Cash outflow = 83000+ 5500= 88,500 thus,(net) investment outlay for the replacement project is: 88,500- 13000 = 75,500. What’s the answe sondin?
The answer is D. $75,500 But the thing I don’t understand is why we consider the increase in NWC required as a cash outflow? NWC = Current assets - Current Liabilities. NWC increase means either current assets increase or current liabilities decrease. Can anyone show how the cash goes with this equation?
Decrease in the liability mean u paid someone to decrease the liability Increase in assets meansyou paid someone to acquire something