Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would cost $245,000.The old press has a net book value of $15,000 and could be sold for $5,000.The increased production of the new press would require an investment in additional working capital of $6,000.The company's tax rate is 40%.What would be Superstrut's net investment now in the project?

Question

Quizplus · Accepted Answer

The net investment is the cost of the new asset, minus the proceeds from the sale of the old asset, plus the investment in additional working capital, all after tax.

The cost of the new asset is $245,000. The gain or loss on the sale of the old asset is calculated as follows:
Sale price - net book value = $5,000 - ($80,000 - $15,000) = -$60,000 (a loss)
However, since this is a non-cash transaction, there is no tax effect.

The investment in additional working capital of $6,000 is also after tax, since this is a cash investment. Thus, the net investment is calculated as:
$245,000 - ($5,000) + ($6,000 × 0.6) = $246,000

Therefore, the best choice is C) $246,000.

Superstrut Is Considering Replacing an Old Press That Cost $80,000