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Metro Corporation will spend $1 million for special manufacturing equipment
Metro Corporation will spend $1 million for special manufacturing equipment. Shipping and installation charges will amount to $175,000 and an initial increase in net working capital of $50,000 will be required. The equipment will replace an existing machine that has a salvage value of $85,000 and a book value of $120,000. If Metro has a current marginal tax rate of 34%, what is the amount of the initial outlay for this project? $1,236,900 $1,225,000 $1.240,300 $1,128,100 $1,140,000
Expert Solution
Cost of equipment = Purchase cost + Installationcharges = $1000,000 + $175,000 = $1,175,000
Increase in net working capital = $50,000
Book value of old machine = $120,000
Salvage value = $85,000
Tax rate = 34%
Loss on sale of old machine = Book value - Salvage value
= $120,000 - $85,000 = $35,000
Tax savings on loss = $35,000 × 34% = $11,900
Cash inflow from old equipment = Salvage value + Tax savings on loss = $85,000 + $11,900 = $96,900
Initial outlay for the project = Cost of equipment (includingInstallation cost ) + Increase in working capital - Cash inflow from old equipment
= $1,175,000 + $50,000 - $96,900
= $1,128,100
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