MENU
Mobile Home Manufacturing, Inc. is evaluating a proposed acquisition of a new machine at a purchase price of $380,000 and installation charges that will amount to $20,000. A $15,000 increase in working capital will be required The machine will hate a useful life of four years, after which it can be sold for $50,000. The estimated annual incremental operating revenues and cash operating expenses are $750,000 and $500,000. respective, for each of the four years. Mobile Home's tax rate is 40%, and the cost of capital is 12%. Mobile Home uses straight-line depreciation for both financial reporting and income tax purposes. If Mobile Home accepts the project, the initial investment will be
The net initial investment for a capital project consists of three components: the purchase of new equipment, the increase in working capital, and the salvage value of old equipment Mobile Home Manufacturing's calculation is thus as follows: