Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased.

Question

Quizplus · Accepted Answer

The NINV (Net Investment) is calculated as the cost of the new extractor minus the after-tax salvage value of the old extractor. The old extractor's book value is $40,000 ($120,000 - ($120,000/15)*10). The after-tax salvage value is $10,000 - 40%*($10,000 - $40,000) = $22,000. Therefore, NINV = $270,000 - $22,000 = $248,000.

Parker Chemicals Purchased a Hexene Extractor 10 Years Ago for $120,000