Trestle Corporation wants to purchase a new finishing machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $95,000 (book value is $75,000). The new machine will cost $635,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $25,000 will be required if the new machine is purchased. The investment is expected to net $80,000 in before tax cash inflows during the first year of operation and $235,000 each additional year of use. These cash flows do not include depreciation and are recognized at the end of each year. The working capital investment will not be recovered at the end of the asset's life. The company's tax rate is 32%.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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What is the net initial investment?
a. $660,000
b. $571,400
c. $565,000
d. $591,400
e. $755,000
f. $748,600
g. $666,400
h. None of the above
5.
Transcribed Image Text:What is the net initial investment? a. $660,000 b. $571,400 c. $565,000 d. $591,400 e. $755,000 f. $748,600 g. $666,400 h. None of the above 5.
Trestle Corporation wants to purchase a new finishing machine. They currently have an old
machine, which is operable for five more years and is expected to have a zero-disposal
value at the end of five years. If the company buys the new machine, the old machine will be
sold now for $95,000 (book value is $75,000). The new machine will cost $635,000 and will
be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The
new machine will not have a salvage value and will not be sold after its useful life. An
additional cash investment in working capital of $25,000 will be required if the new
machine is purchased. The investment is expected to net $80,000 in before tax cash inflows
during the first year of operation and $235,000 each additional year of use. These cash
flows do not include depreciation and are recognized at the end of each year. The working
capital investment will not be recovered at the end of the asset's life. The company's tax
rate is 32%.
Transcribed Image Text:Trestle Corporation wants to purchase a new finishing machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $95,000 (book value is $75,000). The new machine will cost $635,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $25,000 will be required if the new machine is purchased. The investment is expected to net $80,000 in before tax cash inflows during the first year of operation and $235,000 each additional year of use. These cash flows do not include depreciation and are recognized at the end of each year. The working capital investment will not be recovered at the end of the asset's life. The company's tax rate is 32%.
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