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Calculating initial investment   Vastine​ Medical, Inc., is considering replacing its existing computer​ system, which was purchased 3 years ago at a cost of $318,000. The system can be sold today for $194,000. It is being depreciated using MACRS and a​ 5-year recovery period​ (see the table LOADING... ​). A new computer system will cost $496,000 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 book value of the existing computer system. b. Calculate the​ after-tax proceeds of its sale for $194,000. c. Calculate the initial investment associated with the replacement project.

Calculating initial investment   Vastine​ Medical, Inc., is considering replacing its existing computer​ system, which was purchased 3 years ago at a cost of $318,000. The system can be sold today for $194,000. It is being depreciated using MACRS and a​ 5-year recovery period​ (see the table LOADING... ​). A new computer system will cost $496,000 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 book value of the existing computer system. b. Calculate the​ after-tax proceeds of its sale for $194,000. c. Calculate the initial investment associated with the replacement project.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Calculating initial investment   Vastine​ Medical, Inc., is considering replacing its existing computer​ system, which was purchased
3
years ago at a cost of
$318,000.
The system can be sold today for
$194,000.
It is being depreciated using MACRS and a​ 5-year recovery period​ (see the table
LOADING...
​).
A new computer system will cost
$496,000
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 book value of the existing computer system.
b. Calculate the​ after-tax proceeds of its sale for
$194,000.
c. Calculate the initial investment associated with the replacement project.
Data Table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) 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% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 6% 10 6% 11 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.
Transcribed Image Text:Data Table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) 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% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 6% 10 6% 11 4% Totals 100% 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.
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