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 percent.
A)$29,000
B)$31,400
C)$32,600
D)None of the above

Question

Quizplus · Accepted Answer

The net investment is calculated as the cost of the new machine minus the after-tax salvage value of the old machine. The old machine's market value is $6,000, and since it is fully depreciated, the entire amount is taxable. The tax on the sale is 40% of $6,000, which is $2,400. Therefore, the after-tax salvage value is $6,000 - $2,400 = $3,600. The net investment is $35,000 - $3,600 = $31,400.

What Is the Net Investment Required for a Pitting Machine