Jinglin has been asked to evaluate a new machine costing 120

Jinglin has been asked to evaluate a new machine costing $120,000. The old machine has a book value of $30,000 and a market value of $50,000. Old machine will be sold and the after-tax cash flow will be used to offset the cost of the new machine. Net working capital will increase by $5,000. The firm’s tax rate is 40 percent. What is the initial cash outlay for the new machine? Also, please show how to entering numbers in financial calculator HP bII+

Solution

Cost of new machine = $120,000

Net working capital investment = $5,000

Book value of old machine = $30,000

Market value of old machine = $50,000

Gain on sale of old machine = Market value - Book value = $50,000 - $30,000 = $20,000

Tax payable on gain on sale of old machine = $20,000 * 40% = $8,000

After tax cash flow on sale of old machine = Market value – Tax payable on gain on sale

After tax cash flow on sale of old machine = $50,000 - $8,000 = $42,000

Initial cash outlay = Cost of new machine + Net working capital investment - After tax cash flow on sale of old machine

Initial cash outlay = $120,000 + $5,000 - $42,000 = $83,000

In financial calculator this amount shall be entered as negative amount against CFj for year 0.