Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Question

Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below:
 (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Quizplus · Accepted Answer

The NINV (Net Initial Investment) is calculated by considering the cost of the new machine, shipping and installation, minus the after-tax salvage value of the old machine. The old machine's book value is calculated using the MACRS depreciation schedule. The after-tax salvage value is the sale price minus taxes on the gain from the sale.