J.B. Corporation is considering the purchase of equipment that has an invoice price of $450,000. The equipment
was recommended by a consulting firm that did an analysis for J.B. Corporation. J.B. paid the consulting firm
$12,000 for its report.
The cost of shipping and installation is $50,000. The equipment will be depreciated on a
straight-line basis over its useful life of 10 years, assuming no salvage value. The equipment will replace
existing assets that have a current book value of $100,000 and which could be sold for $150,000. Additional net
working capital of $15,000 will be required to maintain the equipment and to support higher sales. J.B.'s
marginal tax rate is 40%. Calculate the initial outlay required to fund this project.
Depreciable cost of the new equipment = $450,000 + $50,000 = $500,000
Proceeds from the Sale of Old Assets = $150,000
Gain on Sale of Old Assets = $150,000 - $100,000 = $50,000
Tax Effect of Sale of Old Assets = $50,000 h 40% = $20,000
Additional Net Working Capital = $15,000
Initial Outlay = $500,000 - $150,000 + $20,000 + $15,000 = $385,000
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