Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.

A) $19,000
B) $16,600
C) $17,400
D) None of the above/cannot be computed

Question

Divya Verma · Accepted Answer

Final Answer : C, Explanation :  To determine the net investment, we need to calculate the proceeds from selling the old grinder, the cost of the new grinder, and the tax implications.Proceeds from selling old grinder = $6,000Cost of new grinder = $25,000Tax implications:- Book value of old grinder = (Purchase price - Depreciation) = ($15,000 - (($15,000/15)*5)) = $6,000- Taxable gain on sale = (Sale price - Book value) = ($6,000 - $6,000) = $0- Tax savings from sale = 0 (no taxable gain)- Tax impact from purchase of new grinder = ($25,000/10)*40% = $10,000Net investment = Cost of new grinder - Proceeds from selling old grinder + Tax impact = $25,000 - $6,000 + $10,000 = $17,400Therefore, the best choice is C.

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