Question

Calculating initial investment Vastine Medical Inc, is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $331,000. The system can be sold today for $203,000. It is being depreciated using MACRS and a 5-year recovery period (see the table ) A new computer system will cost 5508,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% 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 5203.000. c. Calculate the initial investment associated with the replacement project a. The remaining book value is $(Round to the nearest dollar) Enter your answer in the answer box and then click Check Answer 2 pants remaining Clear All Check Answer

Answer 1

Answer a.

Cost of Old Machine = $331,000

Depreciation for Year 1 = 20% * $331,000
Depreciation for Year 1 = $66,200

Depreciation for Year 2 = 32% * $331,000
Depreciation for Year 2 = $105,920

Book Value of Old Machine = Cost of Old Machine - Depreciation for Year 1 - Depreciation for Year 2
Book Value of Old Machine = $331,000 - $66,200 - $105,920
Book Value of Old Machine = $158,880

Answer b.

After-tax Proceeds = Salvage Value - (Salvage Value - Book Value) * Tax Rate
After-tax Proceeds = $203,000 - ($203,000 - $158,880) * 0.40
After-tax Proceeds = $203,000 - $17,648
After-tax Proceeds = $185,352

Answer c.

Initial Investment = - Cost of New Machine + After-tax Proceeds of Old Machine
Initial Investment = -$508,000 + $185,352
Initial Investment = -$322,648