The terminal cash flow for the replacement decision is shown below (fill in the

Question

The terminal cash flow for the replacement decision is shown below (fill in the blank) See table for applicable depreciation percentages P11-22 (similar Assignment Score: 65. 62(6562 of 200 pts) Termiaal cash Dow-Replacement decision Russell Industries is considering replacing a fally depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $204,000 and will require $29,100 in cost. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages A $20,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a4-year period. They estimate that the old machine could be sold at the end of 4 years to net $13,500 before taxes; the new machine at the end of 4 years will be worth $78,000 before taxes. Cakeulate the terminal cash flow at the end of year 4 that is relevant to the pr posed purchase of he new machine. The firm is subject to a 40% tax rate. Procoeds from sale of new machine Tax on sale of new machine Proceeds from sale of eld machine Tax on sale of old machine Total afer-tax proceeds-old asset Change in net working capital Terminal cash flow

Explanation / Answer

Proceeeds from sale of new machine 78000 Tax on sale of new machine 38373*.40 15349.2 Total after-tax proceeds-new asset 62650.8 After-tax proceeds from sale of old asset Proceeds from sale of old machine 13500 Tax on sale of old machine 5400 Total after-tax proceeds-old asset -8100 Change in net working capital 20000 Terminal cash flow 74550.8 l Book value of new machine at end of year.4: [1 (0.20 + 0.32+ 0.19 + 0.12) × ($204,000+29100)] = $39,627 39627 $78,000 $39627 = $35,900 recaptured depreciation 38373

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