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 $29,700 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table LOADING... for the applicable depreciation percentages). A $28,000 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 $15,000 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 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 $198,000 and will require $29,700 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table LOADING... for the applicable depreciation percentages). A $28,000 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 $15,000 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 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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Question
Terminal cash
flow—Replacement
decision Russell Industries is considering replacing a fully
$198,000
and will require
$29,700
in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table
LOADING...
for the applicable depreciation percentages). A
$28,000
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
$15,000
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
40%
tax rate.
Transcribed Image Text: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
Percentage by recovery year*
Recovery year
з уears
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%
6%
10
6%
11
4%
Totals
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.
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