Durable Inc. is considering replacing an old drilling machine that cost $200,000 six years ago with a new one that costs $450,000. Shipping and installation cost an additional $60,000. The old machine has been depreciated using the straight-line (SL) method with no salvage value over an estimated 8-year useful life. The old machine can be sold for $40,000 now or $10,000 in two years. Management expects increases in net working capital of $30,000 (inventories up $10,000, accounts receivable up $32,000, accounts payable up $12,000) if the new machine is acquired. Durable's income tax rate is 30%.
What dollar amount should be used for the net original investment in time period 0 to conduct this replacement decision?
Group of answer choices
|Shipping and installation||-$60,000|
|Net working capital||-$30,000|
|Cash proceeds after tax||$43,000|
|Net original investment in time period 0||-$497,000|
|Calculation of cash proceeds after tax:|
|Net book value (NBV) of old asset:|
|Accumulated depreciation (200,000 × 6/8)||$150,000|
|Loss on disposal||$10,000|
|Tax rate @ 30%|
|Cash inflow from savings in taxes||-$3,000|
|Cash proceeds after tax (40,000 + 3,000)||$43,000|
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