Question

Mills Mining is considering the purchase of additional equipment. The proposed project has the following​ features:

The equipment has an invoice price of​ $390,000 and will cost​ $40,000 to modify for company use. Shipping will cost​ $10,000. The company spent​ $10,000 last year analyzing 5 competing brands of equipment before deciding that this brand was the best for their purposes. The equipment will be depreciated as a​ 3-Year MACRS asset with the following​ rates: Year 1​ – 33%, Year 2​ – 45%, Year 3​ – 15%, and Year 4​ – 7%.

​• If the project is​ undertaken, the company will need an increase in net working capital of​ $40,000. This net working capital will be recovered at the end of the​ project’s three year life.

​• If the project is​ undertaken, the company will realize an additional​ $500,000 in sales over each of the next three years. The​ company’s operating costs​ (excluding depreciation) will be​ $200,000 higher over each of the next three years.

​• If the project is​ undertaken, old equipment that has been fully depreciated can be sold for​ $30,000. If the project is not​ undertaken, the old equipment will last 3 more​ years, at which time its salvage value will be zero.

​• The company’s tax rate is 40 percent.

​• At the end of year​ three, the equipment will have a salvage value of​ $90,000.

​• The project’s cost of capital is 10 percent.  

The net investment​ (NINV) required to fund this project is

A.

​$468,000

B.

​$471,000

C.

​$465,000

D.

​$462,000

Answer 1

Tax rate	40.00%
	Old equipment
WDV	$                        -
Sale price	$                30,000
Gain/(Loss), (30000-0)	$                30,000
Tax benefit	$                12,000	=30000*40%
Sale price after tax	$                18,000	=30000-12000
Cost of new equipment	$              390,000
Modifications cost	$                40,000
Shipping cost	$                10,000
Cost of new equipment	$              440,000
Less: sale proceeds of old equipment	$               (18,000)
Net investment in equipment	$              422,000
Net investment in working capital	$                40,000
Net investment	$              462,000
Hence option D is the correct solution.