10. Vastine Medical, Inc., is considering replacing its existing computer system

Question

10. Vastine Medical, Inc., is considering replacing its existing computer system, which was Calculating initial investment purchased 2 years ago at a cost of $325,000. The system can be sold today for $203,000. It is being depreciated using MACRS and a 5-year recovery period (see the table 1). A new computer system will cost $495,000 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 $203,000 c. Calculate the initial investment associated with the replacement project. a. The remaining book value is $ b. The after-tax proceeds will be $ c. The initial investment will be $ (Round to the nearest dollar.) . (Round to the nearest dollar.) . (Round to the nearest dollar.) 1: Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* 3 years 29% 10 years 10% 18% 14% 12% 9% 8% 7% 5% 5% 5% 4% 100% Recovery year 5 years 20% 32% 19% 12% 12% 5% 7 years 14% 25% 18% 12% 9% 9% 9% 4% 2 15% 4 7% 8 10 Totals 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

Explanation / Answer

(Alll figures are in $) First calculate total Written down value at the end of 2nd year Total Cost 325000 Dep for the Ist year using table = Cost x Convention rate =325000 X 20% = 65000 Dep for the 2nd year =325000*32% 104000 a. Remaining book value at the end of 2nd year =325000- 52000 - 104000 = 169000 b. Net proceeds on sale of computer Total expected proceeds 203000 Less: Remaining book value 169000 Profit 34000 Tax @40% 13600 Net proceeds after tax 20400 c. Initial investment will be: Cost of new computer 495000 Less:Proceeds from existing 182600 (203000-20400) Net investment required: 312400

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