10.

Terminal cash flow-replacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $191,000 and and will require $30,100 in installation cost. It will be depreciated under MACRS using a 5-year recovery period (see table 5 for the applicable depreciation percentages). A $22,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $16,100 before taxes; the new machine at the end of 4 years will be worth $71,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to 40% tax rate.

______________________________________________________________________________________________________________________________________________________________

The terminal cash flow for the replacement decision is shown below:

Proceeds from the sale of new machine $____________

Tax on sale of new machine ______________

Total after-tax proceeds $____________

Proceeds from sale of old machine _____________

Tax on sale of old machine _____________

Total after-tax proceeds-old asset $____________

Change in net working capital ______________

Terminal cash flow $_____________

TABLE 5 APPLICABLE DEPRECIATION PERCENTAGES

Recovery Year 5 YEAR

1 20%

2 32%

3 19%

4 12%

5 12%

6 9%