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 $203,000 and will require $30,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table 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 $14,100 before taxes; the new machine at the end of 4 years will be worth $71,000 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. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.) Proceeds from sale of new machine Tax on sale of new machine Total after-tax proceeds-new asset Proceeds from sale of old machine Tax on sale of old machine Total after-tax proceeds-old asset Change in net working capital Terminal cash flow $ $ $ $ $
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 $203,000 and will require $30,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table 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 $14,100 before taxes; the new machine at the end of 4 years will be worth $71,000 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. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.) Proceeds from sale of new machine Tax on sale of new machine Total after-tax proceeds-new asset Proceeds from sale of old machine Tax on sale of old machine Total after-tax proceeds-old asset Change in net working capital Terminal cash flow $ $ $ $ $
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:## Data Table: 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% |
#### Notes:
- These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism.
- To calculate the actual depreciation for tax purposes, apply the actual unrounded percentages or directly use double-declining balance (200%) depreciation using the half-year convention.
This data table provides a clear overview of the recommended depreciation percentages over various recovery periods using the Modified Accelerated Cost Recovery System (MACRS) for the first four property classes. It is intended to guide users in understanding the typical recovery patterns for asset depreciation, emphasizing the importance of using precise calculations for tax accuracy.
![**Terminal Cash Flow: Replacement Decision**
Russell Industries is considering replacing a fully depreciated machine with a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $203,000 and will require $30,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (refer to the table 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 $14,100 before taxes; the new machine at the end of 4 years will be worth $71,000 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.
**The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.)**
- **Proceeds from sale of new machine**: $ [Blank]
- **Tax on sale of new machine**: $ [Blank]
- **Total after-tax proceeds-new asset**: $ [Blank]
- **Proceeds from sale of old machine**: $ [Blank]
- **Tax on sale of old machine**: $ [Blank]
- **Total after-tax proceeds-old asset**: $ [Blank]
- **Change in net working capital**: $ [Blank]
- **Terminal cash flow**: $ [Blank]
**Explanation:**
This chart is designed to help calculate the terminal cash flow, which involves considering proceeds from the sale of both the new and old machines, accounting for taxes on these sales, and adjusting for changes in net working capital. Terminal cash flow is crucial for evaluating whether the machine replacement is financially viable.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5e2e8d1f-259e-4d47-b4f5-822ff1aa37c9%2F30ae0c0d-f0fd-478d-bd2c-57378729f950%2F8qpa3oa_processed.png&w=3840&q=75)
Transcribed Image Text:**Terminal Cash Flow: Replacement Decision**
Russell Industries is considering replacing a fully depreciated machine with a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $203,000 and will require $30,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (refer to the table 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 $14,100 before taxes; the new machine at the end of 4 years will be worth $71,000 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.
**The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.)**
- **Proceeds from sale of new machine**: $ [Blank]
- **Tax on sale of new machine**: $ [Blank]
- **Total after-tax proceeds-new asset**: $ [Blank]
- **Proceeds from sale of old machine**: $ [Blank]
- **Tax on sale of old machine**: $ [Blank]
- **Total after-tax proceeds-old asset**: $ [Blank]
- **Change in net working capital**: $ [Blank]
- **Terminal cash flow**: $ [Blank]
**Explanation:**
This chart is designed to help calculate the terminal cash flow, which involves considering proceeds from the sale of both the new and old machines, accounting for taxes on these sales, and adjusting for changes in net working capital. Terminal cash flow is crucial for evaluating whether the machine replacement is financially viable.
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