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Capital Budgeting

 Self-Paced Overview

Net Investment

 

Net Investment  =  

Cost of New Project
  +  Installation Costs
  −  Proceeds From Sale or Disposal of Assets
  ±  Taxes on Sale of Assets

The amount of taxes and the way proceeds are taxed depends directly on the relationship between proceeds, the initial purchase price, and the book value of the item being replaced.

Example 1:

Assume a company buys a new tooling machine for $1,000,000, installation costs net of taxes are $100,000, an existing asset has a book value of $200,000, and the company is in the 30% tax bracket.

Sale of Asset for its Book Value:

If an asset is sold for its book value, there is no tax effect.

Assume the company sells the existing asset for $200,000.

Cost
Installation
Proceeds
Taxes
Net Investment

 
  +  
  −  
 
 

$1,000,000 
$100,000 
$200,000 
$0 
  $900,000 

Book value and market value are the same, so there is no tax effect.

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