Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?

Question

Quizplus · Accepted Answer

To calculate the net investment, we need to consider the following:

Initial cost of the equipment: $800,000
Shipping and installation charges: $240,000
Increase in net working capital: $48,000
Salvage value of the existing machine: $75,000

So, the total cost of the new equipment is calculated as follows:

Total cost = Initial cost + Shipping and installation charges + Increase in net working capital - Salvage value of the existing machine
Total cost = $800,000 + $240,000 + $48,000 - $75,000
Total cost = $1,013,000

Now, we need to consider the tax implications. Since Shunt has a marginal tax rate of 34 percent, the tax savings due to depreciation can be calculated as follows:

Tax savings = (Depreciation expense x Tax rate)
Depreciation expense = (Initial cost - Salvage value) / Useful life
Useful life = 5 years (assuming straight-line depreciation)

Depreciation expense = ($800,000 - $75,000) / 5
Depreciation expense = $145,000

Tax savings = $145,000 x 0.34
Tax savings = $49,300

Therefore, the net investment can be calculated as follows:

Net investment = Total cost - Tax savings
Net investment = $1,013,000 - $49,300
Net investment = $963,700

Therefore, the best choice is D, $996,000.

Shunt Technology Will Spend $800,000 on a Piece of Equipment