Chapter 11 682018 3. Initial investment at various sale prices Edwards Manufactu

Question

Chapter 11 682018 3. Initial investment at various sale prices Edwards Manufacturing Company (EMC) is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine machine costs S23 400 and requires S subject to a 40% tax rate In each of the following cases, calculate the iniial investment for the replacement a, EMC sells the old machine for $12,500 b. EMC sells the old machine for $7,040 c. EMC sells the old machine for $2,900 d. EMC sells the old machine for $1,540. under MACRS, using a 5-year recovery period. (See table 2 for the 1,980 in installation costs. The firm is percentages.) The new Calculate the initial investment at various sale prices below a. EMC sells the old machine for $12,500. (Round to the nearest dollar Cost of new asset Instalation cost Total installed cost Proceeds from sale of old asset Tax on sale of old asset Total after-tax proceeds Initial investment $ b. EMC sells the old machine for $7,040. (Round to the nearest dollar.) Cost of new asset Installation cost Total installed cost $ 23,400 1,980 $ 25,380 Proceeds from sale of old asset $ Tax on sale of old asset Total after-tax proceeds Initial investment c. EMC sells the old machine for $2,900. (Round to the nearest dollar.)

Explanation / Answer

Calculation of initial investment for the replacement Answer a - EMC sells the old machine for $12500 Answer c - EMC sells the old machine for $2900 (a) (c) Cost of new asset $23,400.00 Cost of new asset $23,400.00 Installation cost $1,980.00 Installation cost $1,980.00 Total Installed Cost $25,380.00 Total Installed Cost $25,380.00 Proceeds from Sale of old asset $12,500.00 Proceeds from Sale of old asset $12,500.00 Tax on sale of old asset [$12500-$2900]*40% $3,840.00 Tax on sale of old asset [$2900-$2900]*40% $0.00 Total after tax proceeds $8,660.00 Total after tax proceeds $12,500.00 Initial Investment $16,720.00 Initial Investment $12,880.00 Answer b - EMC sells the old machine for $7040 Answer d - EMC sells the old machine for $1540 (b) (d) Cost of new asset $23,400.00 Cost of new asset $23,400.00 Installation cost $1,980.00 Installation cost $1,980.00 Total Installed Cost $25,380.00 Total Installed Cost $25,380.00 Proceeds from Sale of old asset $7,040.00 Proceeds from Sale of old asset $12,500.00 Tax on sale of old asset [$7040-$2900]*40% $1,656.00 Tax on sale of old asset [$1540-$2900]*40% -$544.00 Total after tax proceeds $5,384.00 Total after tax proceeds $13,044.00 Initial Investment $19,996.00 Initial Investment $12,336.00 Working Calculation of depreciation on old machine using MACRS 5 year recovery period Year Installed cost of old machine Depreciation rate Depreciation Book value of old machine 1 10000 20% 2000 $8,000.00 2 10000 32% 3200 $4,800.00 3 10000 19% 1900 $2,900.00

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