P11–12 Initial investment: Basic calculation Cushing Corporation is considering

Question

P11–12 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

3 years ago at an installed cost of $20,000; it was being depreciated under

MACRS using a 5-year recovery period. (See Table 4.2 on page 120 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 $35,000 and requires $5,000 in installation

costs; it will be depreciated using a 5-year recovery period under MACRS. The

existing machine can currently be sold for $25,000 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.

Explanation / Answer

Cost of New Machine 35000 Installation Cost 5000 Total Cost 40000 Less:Sale price of Old Machine 25000 Investment in New Machine 15000 Answer: $ 15,000 Sale of Old machine is possible when new machine purchased. This is an opportunity to gain if new machine is purchased.

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