Question

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?

Answer 1

-$193,250

Step-by-step 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.