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# (Solved): Calculating initial investment. Vastine Medical Inc. is considering replacing its existing computer ...

 Calculating initial investment. Vastine Medical Inc. is considering replacing its existing computer system, which was purchased 2 years ago at a cost of \$325,000. The system can be sold today for \$200,000. It is being depreciated using MACRS and a 5-year recovery period (see Table 4.2). A new computer system will cost \$500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 21% tax rate. a. Calculate the book value of the existing computer system (See Table 4.2). b. Calculate the after-tax proceeds of its sale for \$200,000. c. Calculate the initial investment associated with the replacement project. Solution Table 4.2 Percentage by recovery year Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45% 32% 25% 18% 3 15% 19% 18% 14% 4 7% 12% 12% 12% 5 12% 9% 9% 6 5% 9% 8% 7 9% 7% 8 4% 6% 9 6% 10 6% 11 4% Totals 100% 100% 100% 100% a. Calculate the book value of the existing computer system (See Table 4.2). Original cost of old equipment Recover Percentage Change in Net Working Capital b. Calculate the after-tax proceeds of its sale for \$200,000. Sales price of old equipment Book price of old equipment Recapture of depreciation Tax Rate @ 21% Taxes on recapture of depreciation After-tax Proceeds c. Calculate the initial investment associated with the replacement project. Cost of new equipment Less sales price of old machine Plus tax on recapture of depreciation (21% tax rate) After-tax Proceeds

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