Question

Shunt Technology 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 Shunt has a current marginal tax rate of 34 percent, what is the net investment

Answer 1

Answer:

$1,180,000

Explanation:

The net initial investment will include the following components:

1. Fixed capital investment = Purchase cost of the equiment = $800,000 + $240,000 = $1,040,000

2. Increase in working capital of $48,000

3. Sales proceeds of existing machine of $75,000

4. Tax on gain/loss of sales on existing machine = (75,000 - 125,000) x 34% = $- 17,000

So, total net initial investment is $1,040,000 + $48,000 + $75,000 - (-$17,000) = $1,180,000