A company has collected the following information about a new machine that itis evaluating for possible investment: Purchase price$340,000 Salvage value at the end of three years$15,000 Shipping and installation$50,000 Book value at the end of three years$5,000Marginal tax rate40%

A. What is the machine's depreciable basisthat is, the amount that can be depreciated during its life?

B. In three years, what will be the net cash flow generated by the disposal of the machine?

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The Gehr Company is considering the purchase of a new machine tool to replace an obsolete one. The machine being used for the operation has both a book value and a market value of $0; it is in good working order, however, and will last physically for at least another 10 years.

The proposed replacement machine will perform the operation so much more efficiently that Gehr engineers estimate it will produce after-tax cash flows (cost savings) of $9,000 per year. The new machine will cost $40,000 delivered and installed, and its useful life is estimated to be 10 years. Its expected salvage value is $0.

The firm's required rate of return is 10 percent, and its marginal tax rate is 40 percent.

Should Gehr buy the new machine?

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Galveston Shipyards is considering the replacement of an eight-year-old riveting machine with a new one that will increase earnings before depreciation from$27,000 to $54,000 per year. The new machine will cost $82,500, and it will have an estimated life of eight years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period. (See Table 13A-2 at the end of this chapter for MACRS recovery allowance percentages.) The firm's marginal tax rate is 40 percent, and the firm's required rate of return is12 percent. The old machine has been fully depreciated and has no salvage value.

Should the old riveting machine be replaced by the new one"