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Trist Inc. replacing an old stamping line that cost $80,000 five years ago, with a new,...

Trist Inc. replacing an old stamping line that cost $80,000 five years ago, with a new, more efficient machine that will cost $225,000. Shipping and installation will cost an additional $15,000. The old machine has a book value of $15,000 but will be sold as scrap for $5,000. The new machine will be depreciated with a 7-year life under MACRS guidelines. With the increased production, inventories will increase $5,000, account receivable will increase $15,000, and account payable will increase $15,000. If Trist Inc. has a marginal tax rate of 40 percent, what is the net investment (NINV)? Show work.

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Expert Solution

Net salvage value of old machine = Mkt value – (mkt value – book value) x tax rate

                                                               = 5000-(5000-15000)*.40

                                                               = 5000 +4000

                                                                = 9000

Net investment = cost of new asset + shipping and installation – net salvage value of old machine

                              = $225,000 +15000-9000

                              = $231,000

Thus, Net Investment would be $231,000.

jeff jeffy answered 2 years ago
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