US CMA Part 2 · Chapter 8 · Question 2 of 15
Quayle Packaging will buy a machine for $800,000 plus $40,000 of shipping and installation, and will need an additional $60,000 of net working capital. The old machine will be sold for $100,000; its tax basis is $140,000. The tax rate is 25%. What is the net initial investment?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $790,000
Explanation
Tax loss on old machine = $140,000 - $100,000 = $40,000, creating a tax saving of $40,000 x 25% = $10,000. After-tax proceeds = $100,000 + $10,000 = $110,000. Net initial investment = $800,000 + $40,000 + $60,000 - $110,000 = $790,000.
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