Reference no: EM132606233
Guitar Center is considering replacing their current sound & light systems. The following information can be used:
Purchase price of new systems will be: $1,750,000.
Installation (set-up) costs $10,000, this will be a one-time cost.
The current sound and light system to be replaced was purchased 3 years ago at a total cost of $1,200,000. A 4-year straight-line depreciation is applicable for this equipment. A buyer is willing to pay $500,000 for the present equipment. You as the financial manager calculated there you will need less net working capital due to better usage of light bulbs and cables. The impact on net working capital will be reduced by $15,000. The firm pays 35% taxes on ordinary income and capital gains & losses.
Question 1: Calculate the initial investment associated with the proposed purchase of the new machine in the three steps shown below. Show calculations.
Initial Costs $[A]
Installation Costs $[B]
Total Costs $[C]
Sale of Old Machine $[D]
Taxes on Sale $[E]
After-tax proceeds from the sale of old machine $[F]
Changes in Working Capital +/- $[G]
Total Initial Investment $[H]
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