Question

Initial investment —Basic calculation   Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 33 years ago at an installed cost of $19,500​; it was being depreciated under MACRS using a​ 5-year recovery period.​ (See table for the applicable depreciation​ percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $35,400 and requires $4,700 in installation​ costs; it will be depreciated using a​ 5-year recovery period under MACRS. The existing machine can currently be sold for $24,400 without incurring any removal or cleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

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​(Round to the nearest​ dollar.)

Answer 1

Old machine is fully depreciated.

So, After-tax salvage value of the old machine = Salvage Value * (1 - t)

= $24,400 * (1 - 0.40) = $14,640

Initial investment for new machine = Cost of new machine + Installation Cost - After-tax salvage value

= $35,400 + $4,700 - $14,640 = $25,460