A firm is considering a capital project for which the following information is available: An existing piece of equipment that would be disposed of to make room for new equipment has a historical cost of $370,000. It has a salvage value of $10000 and has been depreciated on a straight-line basis for 16 of the estimated 18 years of its useful life. The new equipment has a cost of $500,000 and the firm expects it will have to devote $20,000 in cash and $24,000 in accounts receivable to the new project. The firm's effective tax rate is 40%. The required net initial irwestrnent in the new project is?
The net initial investment consists of the initial outlay for new equipment ($500,000) plus the increase to working capital ($44,000) minus the net after-tax cash flow from the disposal of the old equipment ($26,000). The cash inflow from the disposal of the old equipment is calculated as follows: