StudyFinance

StudyFinance

Capital Budgeting

 Self-Paced Overview

Net Investment

Example 2:

Assume again that 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 Less than Book Value:

If a company disposes of an asset for less than its book value, it will experience a loss.
This loss may result in tax savings.

Assume the company sells the existing asset for $75,000.

Cost
Installation
Proceeds
Taxes
Net Investment

 
  +  
  −  
  −  
 

$1,000,000 
$100,000 
$75,000 
$37,500 
  $987,500 

Tax savings from loss = $37,500 ($200,000 − $75,000) × .30

StudyFinance.com is maintained by Dr. Sharon Garrison
Terms of Use • Privacy • Copyright © 1999–2018 StudyFinance.com