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Capital Budgeting

 Self-Paced Overview

Net Investment

Example 3:

Assume once more 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 More than its Book Value:

This would result in additional taxes, since depreciation would be recaptured.

Assume the company sells the existing asset for $225,000.

Cost
Installation
Proceeds
Taxes
Net Investment

 
  +  
  −  
  −  
 

$1,000,000 
$100,000 
$225,000 
$7,500 
  $882,500 

Taxes = $7,500 ($225,000 − $200,000) × 30%

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