1) ABT Manufacturing Company Limited Ltd is considering replacing its existing computer system, which was purchased 4 years ago at a cost of $625,000. The system can be sold today for $220,000. It is being depreciated using MACRS and a 6-year recovery period. The accumulated depreciation at the end of the fourth year is $500,000. A new computer system will cost $820,000 to purchase and install. In five (5) years time the new computer system can be removed and sold for a net receipt of $205,000. The new computer system also uses MACRS 6-year recovery period depreciation method. The accumulated depreciation at the end of the fifth year will be $710,000. Replacement of the old computer system with the newer computer system will result in current assets increasing by $7,000, while current liabilities will decrease by $3,500. Assume a 40% tax rate. Answer the following questions: a. Calculate the installed cost of the new computer system b. Calculate the net book value of the existing computer system. c. Calculate the profit/loss from the sale of the existing computer system d. Calculate the after-tax proceeds from the sale of the existing computer system. e. Calculate the change in net working capital f. Calculate the initial investment associated with the replacement project
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
1) ABT Manufacturing Company Limited Ltd is considering replacing its existing computer system, which was purchased 4 years ago at a cost of $625,000. The system can be sold today for $220,000. It is being
end of the fifth year will be $710,000. Replacement of the old computer system with the newer computer system will result in current assets increasing by $7,000, while current liabilities will decrease by $3,500. Assume a 40% tax rate.
Answer the following questions:
a. Calculate the installed cost of the new computer system
b. Calculate the net book value of the existing computer system.
c. Calculate the
d. Calculate the after-tax proceeds from the sale of the existing computer system.
e. Calculate the change in net
f. Calculate the initial investment associated with the replacement project
Step by step
Solved in 7 steps
