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IMANET Exam CMA Topic 3 Question 66 Discussion
Topic #: 3
A company is considering the purchase of a new machine to replace a five-year old machine and has gathered the following information: Purchase price of new machine $50,000 Installation cost of new machine 4,000 Market value (selling price) of the old machine 5,000 Book value of the old machine 2,000 Increase in net working capital if new machine is installed 1,000 Effective income tax rate 40% It the company replaces the old machine with the new machine, what is the cash flow in period 0?
The net initial investment for a capital project consists of three components: the purchase of new equipment, the increase in working capital, and the after-tax proceeds from the disposal of old equipment For this company, the first of these is $54,000 ($50,000 + $4,000), and the second is $1,000. The calculation of the after-tax proceeds from the disposal of the old equipment is as follows:
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