Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a​ newer, more sophisticated machine. The new machine will cost $194,000 and will require $29,400 in installation costs. It will be depreciated under MACRS using a​ 5-year recovery period​ 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​%  A $30,000 increase in net working capital will be required to support the new machine. The​ firm's managers plan to evaluate the potential replacement over a​ 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $13,200 before​ taxes; the new machine at the end of 4 years will be worth $72,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 21% tax rate.

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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Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a​ newer, more sophisticated machine. The new machine will cost $194,000 and will require $29,400 in installation costs. It will be depreciated under MACRS using a​ 5-year recovery period​

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​%

 A $30,000 increase in net working capital will be required to support the new machine. The​ firm's managers plan to evaluate the potential replacement over a​ 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $13,200 before​ taxes; the new machine at the end of 4 years will be worth $72,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 21% tax rate.

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