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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 year3 years5 years7 years10 years
133%20%14%10%
245%32%25%18%
315%19%18%14%
47%12%12%12%
5 12%9%9%
6 5%9%8%
7 9%7%
8 4%6%
9 6%
10 6%
11 4%
Totals100%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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