Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.

Question

Quizplus · Accepted Answer

To determine the net investment, we need to calculate the proceeds from selling the old grinder, the cost of the new grinder, and the tax implications.

Proceeds from selling old grinder = $6,000

Cost of new grinder = $25,000

Tax implications:
- Book value of old grinder = (Purchase price - Depreciation) = ($15,000 - (($15,000/15)*5)) = $6,000
- Taxable gain on sale = (Sale price - Book value) = ($6,000 - $6,000) = $0
- Tax savings from sale = 0 (no taxable gain)
- Tax impact from purchase of new grinder = ($25,000/10)*40% = $10,000

Net investment = Cost of new grinder - Proceeds from selling old grinder + Tax impact = $25,000 - $6,000 + $10,000 = $17,400

Therefore, the best choice is C.

Felix Industries Purchased a Grinder 5 Years Ago for $15,000