A company is considering the purchase of a new high-speed machine to replace the existing machine. The existing machine (old) was purchased 2 years ago at an installed cost of $55,000; it was being depreciated under MACRS using a 5-year recovery period. The new machine costs $85,000 and requires $5,000 in installation costs.

The company can currently sell the existing machine for $70,000 without incurring any removal or cleanup costs. To support the increased business resulting from purchase of the new machine, accounts receivable would increase by $50,000, inventories would increase by $15,000, and accounts payable would increase by $28,000, and accruals would increase by $30,000. The firm is subject a 40% tax rate.

Depreciation Percentages by Recovery Year Using MACRS

No.	1	2	3	4	5	6
5 years	20%	32%	19%	12%	12%	5%

1- Calculate the initial investment associated with the replacement of the existing machine by the new one.

2- If the company can sell the existing machine for $10,000 instead of $70,000, calculate again the initial investment associated with the replacement of the existing machine by the new one.

Solution of No.1

Installed cost of new asset		Answer
Cost of new asset	Answer
Installation costs	Answer
After-tax proceeds from sale of old asset		Answer
Proceeds from sale of old asset	Answer
Tax: on sale of old asset	Answer
Change in net working capital		Answer
Initial investment		Answer

Solution of No.2

Installed cost of new asset		Answer
Cost of new asset	Answer
Installation costs	Answer
After-tax proceeds from sale of old asset		Answer
Proceeds from sale of old asset	Answer
Tax: on sale of old asset	Answer
Change in net working capital		Answer
Initial investment		Answer