5. Attaway General, Ic., is considerin Ctr) * z its existing computer system, which was purchased 2 years ago at a cost of P325,000. The system can be sold today for P200,000. It is being depreciated using MACRS and a 5-year recovery period. A new computer system will cost P500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the initial investment associated with the replacement project.
5. Attaway General, Ic., is considerin Ctr) * z its existing computer system, which was purchased 2 years ago at a cost of P325,000. The system can be sold today for P200,000. It is being depreciated using MACRS and a 5-year recovery period. A new computer system will cost P500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the initial investment associated with the replacement project.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:5. Attaway General, Inc., is considerinD (Ctn) "3 its existing computer system, which was
purchased 2 years ago at a cost of P325,000. The system can be sold today for P200,000. It
is being depreciated using MACRS and a 5-year recovery period. A new computer system
will cost P500,000 to purchase and install. Replacement of the computer system would not
involve any change in net working capital. Assume a 40% tax rate on ordinary income and
capital gains.
a. Calculate the initial investment associated with the replacement project.
6. A firm is considering renewing its equipment to meet increased demand for its product.
The cost of equipment modifications is P1.9 million plus P100,000 in installation costs. The
firm will depreciate the equipment modifications under MACRS, using a 5-year recovery
period. Additional sales revenue from the renewal should amount to P1.2 million per year,
and additional operating expenses and other costs (excluding depreciation) amount to 40%
of the additional sales. The firm has an ordinary tax rate of 40%. (Note: Answer the following
questions for each of the next 3 years only.)
a. What incremental operating cash inflows will result from the renewal?
Transcribed Image Text:For computation of Depreciation on items 5 and 6
TABLE 3.2 Rounded Depreciation
Percentages by Recovery Year
Using MACRS for First Four
Property Classes
Percentage by recovery year"
Recovery year
3 years
5 years
7 years
10 years
1
33%
20%
14%
10%
2
45
32
25
18
15
19
18
14
4
7
12
12
12
12
9.
9.
8
7
9.
7.
4
6.
6.
10
11
Totals
100%
100%
100%
100%
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