atlantic control company purchased a machine 2 years ago at a cost of $70,000. the machine is being depreciated using simplified straight-line over its 7-year class life. the machine would have no salvage value at the end of year 7, but could be sold now for $40,000. a new replacement machine can be purchased for $80,000. the new machine would be depreciated over 5 years. rapidly changing technology has necessitated this project. delivery and installation charges will amount to $10,000 and net working capital investment of $5,000 will be required at installation. the new machine will not increase sales, but will reduce operating costs by $20,000 per year. the firm's marginal tax rate is 35%. what is the initial outlay for the project? group of answer choices

The first investments required to start a certain project are referred to as an initial outlay. As an illustration, in order to start a new plant, a business would need to buy new land and equipment.

Accumulated depreciation = depreciation per year for 2 years

=$10,000 * 2

=$20,000

Net book value of old machine = Purchase cost - Accumulated depreciation

=$70,000 - $20,000

=$50,000

The salvage value is $40,000

Gains / (loss) on sale of old machine = Salvage value - Net book value of old machine

=$40,000 - $50,000

=($10,000)

tax rate= 35%

Tax shield on sale of old machine = loss on sale of old machine ×Tax rate

=$10,000 × 35%

=$3,500

Cash inflow on sale of old machine = Salvage value + Tax shield on sale of old machine

=$40,000 + $3,500

=$43,500

purchase cost new machine $80,000

delivery and installation charges $10,000

net-working capital requirement at beginning of project is $5,000

Cash outflow at start of the project = Purchase cost of new machine + Delivery and installation charges + net-working capital requirement

=$80,000 + $10,000 + $5,000

=$95,000

initial outlay = Cash inflow on the sale of the old machine - Cash outflow at the start

=$43,500 - $95,000

= -$51,500

Thus initial outlay is -$51,500

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