Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 2 years ago at an installed cost of $19,800; it was being depreciated under MACRS using a 5-year recovery period. (See table LOADING... for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,900 and requires $4,500 in installation costs; it will be depreciated using a 5-year recovery period under MACRS. The existing machine can currently be sold for $25,700 without incurring any removal or cleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine. Data table (Click on the icon located on the top-right corner of the data table below in order to copy its contents 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% 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 convention.

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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nitial

investment—Basic

calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased

years ago at an installed cost of

$19,800;

it was being depreciated under MACRS using a 5-year recovery period. (See table

for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs

$35,900

and requires

$4,500

in installation costs; it will be depreciated using a 5-year recovery period under MACRS. The existing machine can currently be sold for

$25,700

without incurring any removal or cleanup costs. The firm is subject to a

40%

tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

Data table

(Click on the icon located on the top-right corner of the data table below in order to copy its contents 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%
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 convention.

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