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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $27,000 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 dolla S 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 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 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year 5 years 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 5% 100% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100%
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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $27,000 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 dolla S 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 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 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year 5 years 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 5% 100% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100%
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 $198,000 and will
require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $27,000 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 $13,500 before taxes; the new machine at the end of 4 years will be worth
$74,000 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 dolla
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
$
$
$
$
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
2
3
4
5
6
7
8
9
10
11
Totals
3 years
33%
45%
15%
7%
100%
Percentage by recovery year*
5 years
7 years
20%
14%
32%
19%
12%
12%
5%
100%
25%
18%
12%
9%
9%
9%
4%
100%
10 years
10%
18%
14%
12%
9%
8%
7%
6%
6%
6%
4%
100%
-
X
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