Calculating initial investment Vastine Medical, Inc., is considering replacing i

Question

Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $331,000 The system can be sold today for $207,000. It is being depreciated using MACRS and a 5-year recovery period (see the table A new computer system will cost $490,000 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 $207,000 c. Calculate the initial investment associated with the replacement project.

Explanation / Answer

Calculate the book value of the existing computer system.

Accumulated Depreciation =331000*20%+331000*32%=172120

Book value =331000-172120=158880

2

Calculate the after-tax proceeds of its sale for $207,000.

3

Calculate the initial investment associated with the replacement project.

Sales Value 207000 Less Book Value 158880 Gain on sales 48120 Tax 40% 19248 Net Proceeds for its sales 207000-19248 187752

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