Terminal cash flow-Replacement decision 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 $192,000 and will require $29,900 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $25,000 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 $16,800 before taxes; the new machine at the end of 4 years will be worth $70,000 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 40% tax rate.

Terminal cash flow-Replacement decision 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 $192,000 and will require $29,900 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $25,000 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 $16,800 before taxes; the new machine at the end of 4 years will be worth $70,000 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 40% 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

Section: Chapter Questions

Problem 1PS

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Calculating initial cash flow Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $319,000. The system can be sold today for $206,000. It is being depreciated using MACRS and a 5-year recovery period (see the table computer system will cost $491,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 21% 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 $206,000. c. Calculate the initial cash flow associated with the replacement project. a. The remaining book value is $ (Round to the nearest dollar.) 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 Recovery year 1 10 years 10% 18% 14%…
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