A company is looking to purchase and replace a fixed asset for $235,000. It will sell the asset that will be replaced for $47,000 but will incur a $15,000 gain upon that sale. It must also commit $30,000 of working-capital to the investment. The firm's tax rate is 35 %. What is the amount of the relevant initial investment?

Question

Derick Andersen

Business

28 October, 10:42

A company is looking to purchase and replace a fixed asset for $235,000. It will sell the asset that will be replaced for $47,000 but will incur a $15,000 gain upon that sale. It must also commit $30,000 of working-capital to the investment. The firm's tax rate is 35 %. What is the amount of the relevant initial investment?

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Stevens · Answer 1

-$193,250

Explanation:

Relevant Initial Investment:

= New Investment + Gains * (-Tax rate) + Salvage Value

= - 235,000 + 15,000 * (-35%) + 47,000

= - $235,000 - $5,250 + $47,000

= - $193,250

Net working capital is a cash outflow at the beginning of the project but it will be recovered at the end.

So, it is not considered as initial investment.