Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%. The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years are given in the table attached. . ​(The second table1894  contains the applicable MACRS depreciation​ percentages.) Note:The new machine will have no terminal value at the end of 5 years.   a. Calculate the initial cash flow associated with replacement of the old machine by the new one.   b. Determine the periodic cash flows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)   c. Depict on a time line the net cash flows found in parts ​(a​) and ​(b​) associated with the proposed replacement decision.

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
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 Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%.
The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years are
given in the table attached.
.
​(The second table1894  contains the applicable MACRS depreciation​ percentages.) Note:The new machine will have no terminal value at the end of 5 years.
 
a. Calculate the initial cash flow associated with replacement of the old machine by the new one.
 
b. Determine the periodic cash flows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)
 
c. Depict on a time line the net cash flows found in parts ​(a​) and ​(b​)
associated with the proposed replacement decision.
a table
ick on the icon here in order to copy the contents of the data table below into a spreadsheet.)
Old machine
New machine
Expenses
(excluding depreciation and
interest)
Expenses
(excluding depreciation and
interest)
$660,500
Revenue
Year
Revenue
$674,700
$719,600
719,600
$749,600
676,700
660,500
749,600
749,600
680,700
660,500
719,600
678,700
660,500
749,600
719,600
674,700
660,500
749,600
719,600
Print
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Transcribed Image Text:a table ick on the icon here in order to copy the contents of the data table below into a spreadsheet.) Old machine New machine Expenses (excluding depreciation and interest) Expenses (excluding depreciation and interest) $660,500 Revenue Year Revenue $674,700 $719,600 719,600 $749,600 676,700 660,500 749,600 749,600 680,700 660,500 719,600 678,700 660,500 749,600 719,600 674,700 660,500 749,600 719,600 Print Done Clear all Chec Get more help - Media - ple Financial calculator W -2 3 45
consider the depreciation in year 6.)
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*
5 years
Recovery year
3 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%
12%
9%
9%
6.
5%
9%
8%
7
9%
7%
8
4%
6%
9.
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
eck answer
convention
X
58°F Sunr
Transcribed Image Text:consider the depreciation in year 6.) 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* 5 years Recovery year 3 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% 12% 9% 9% 6. 5% 9% 8% 7 9% 7% 8 4% 6% 9. 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 eck answer convention X 58°F Sunr
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