Question

P11–22 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 $200,000 and will require $30,000 in installation costs. It will be depreciated under MACRS, using a 5-year recovery period (see Table 4.2 for the applicable depreciation percentages). A $25,000 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 tha 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 $75,000 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.

I don't own a financial calculator, I own the Ti84 Plus, please show work. thanks.

Table 4.2

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

	Percentage by recovery yeara
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%

Answer 1

Cost of asset	230000
year	Depreciation rate	Depreciation	W D V
1	20%	46000	184000
2	32%	73600	110400
3	19%	43700	66700
4	12%	27600	39100

The value of asset at the end of year is 39100

The Selling price of new asset over old asset is 60000 (75000-15000)

Capital gain is 20900

Tax on capital gain @ 40% is 8360

Tax saved on Depreciation of 27600 @ 40% is 11040

Cash inflow in 4th year is 71040

Cash out flow in 4th year is 8360

Net cash inflow is 62680