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 $30,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table E for the applicable depreciation percentages). 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 $14,200 before taxes; the new machine at the end of 4 years will be worth $80,000 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. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.) O Data Table Proceeds from sale of new machine Tax on sale of new machine Total after-tax proceeds-new asset (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Proceeds from sale of old machine Tax on sale of old machine Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Total after-tax proceeds-old asset 24 Percentage by recovery year* 5 years Change in net working capital Recovery year 3 years 33% 7 years 10 years Terminal cash flow 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 12% 9% 9% 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
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 $30,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table E for the applicable depreciation percentages). 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 $14,200 before taxes; the new machine at the end of 4 years will be worth $80,000 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. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.) O Data Table Proceeds from sale of new machine Tax on sale of new machine Total after-tax proceeds-new asset (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Proceeds from sale of old machine Tax on sale of old machine Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Total after-tax proceeds-old asset 24 Percentage by recovery year* 5 years Change in net working capital Recovery year 3 years 33% 7 years 10 years Terminal cash flow 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 12% 9% 9% 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
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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Transcribed Image Text: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 $30,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table E for the applicable depreciation percentages). 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 $14,200 before taxes; the new machine at the end of 4 years will be worth
$80,000 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.
The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.)
Proceeds from sale of new machine
$
Data Table
Tax on sale of new machine
Total after-tax proceeds-new asset
$
(Click on the icon located on the top-right corner of the data table below in order to copy its
contents into a spreadsheet.)
Proceeds from sale of old machine
$
Tax on sale of old machine
Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Total after-tax proceeds-old asset
$
Percentage by recovery year*
5 years
Change in net working capital
Recovery year
3 years
7 years
10 years
Terminal cash flow
$
1
33%
20%
14%
10%
2
45%
32%
25%
18%
3
15%
19%
18%
14%
4
7%
12%
12%
12%
12%
9%
9%
5%
9%
8%
7
9%
7%
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
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