Calculating initial investment ?? Vastine? Medical, Inc., is considering replaci
ID: 2618438 • Letter: C
Question
Calculating initial investment ??
Vastine? Medical, Inc., is considering replacing its existing computer? system, which was purchased 2 years ago at a cost of $327,000. The system can be sold today for $193,000. It is being depreciated using MACRS and a? 5-year recovery period? (see the table)
A new computer system will cost $491,000 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.
book value = cost - accumulated depreciation
round to the nearest dollar
b. Calculate the? after-tax proceeds of its sale for $193,000.
taxes on recapture of depreciation = (sale price - book value) x tax rate
round to the nearest dollar
c. Calculate the initial investment associated with the replacement project.
initial investment = cost of new machine - after-tax proceeds
round to the nearest dollar
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 5 years 20% 32% 19% 12% 12% 5% 7 years 14% 25% 18% 12% 9% 9% 9% 4% 10 years 10% 18% 14% 12% 9% 5% 7% 6% 6% 3 years 33% 45 15% 7% Recovery year 4 Print DoneExplanation / Answer
Answer a.
Cost of Old Computer System = $327,000
Depreciation Year 1 = 20.00% * $327,000
Depreciation Year 1 = $65,400
Depreciation Year 2 = 32.00% * $327,000
Depreciation Year 2 = $104,640
Book Value of Old Computer System = $327,000 - $65,400 - $104,640
Book Value of Old Computer System = $156,960
Answer b.
Taxes on recapture of depreciation = (Sales Price - Book Value) * tax rate
Taxes on recapture of depreciation = ($193,000 - $156,960) * 0.40
Taxes on recapture of depreciation = $14,416
After-tax proceed from sales = Sales Price - Taxes on recapture of depreciation
After-tax proceed from sales = $193,000 - $14,416
After-tax proceed from sales = $178,584
Answer c.
Initial Investment = Cost of New Computer System - After-tax proceed from sales
Initial Investment = $491,000 - $178,584
Initial Investment = $312,416
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