It is Jan 1. The Rumpel Company purchased a felt press last year at a cost of $
ID: 2782464 • Letter: I
Question
It is Jan 1. The Rumpel Company purchased a felt press last year at a cost of
$ 7,000. The machine had an expected life of 3 years at the time of purchase. The machine is depreciated using MACRS with a 5-year recovery period. The book value at the end of the machine's three year life is $ 2,137 . The division manager reports that, for $ 13,000 (including installation), a new felt press can be bought that will last two years. The new machine has a 3-year MACRS recovery period and so will have a book value of $ 2,733 at the end of two years. Two years after replacement the old press can be sold for $ 400 and the new press is worth $ 2,000. Taxes are 40 %. What is the incremental net salvage cash flow in the terminal year if the old press is replaced?
The incremental net salvage cash flow in the terminal year if the old press is ? (Round to the nearest cent.)
Explanation / Answer
Incremental Net Salvage cash flow on replacement = Net salvage cash flow of New Press - Net salvage cash flow of Old Press
= (Salvage value of New press + Tax saving on Sale of New Press) - (Salvage value of Old press + Tax saving on Sale of Old Press)
= {$2000 + ($2733 - $2000) x 40%} - {$400 + ($2733 - $400) x 40%}
=($2000 + $293.20) - ($400 + $694.80)
= $2293.20 - $1094.80
= $1198.40 (Answer)
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