Calculating initial investment

Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $324,000. The system can be sold today for $209,000. It is being depreciated using MACRS and a 5-year recovery period (see the table ).

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes
	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%
*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention.

A new computer system will cost $502,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a40%tax rate on ordinary income and capital gains.

a. Calculate the book value of the existing computer system.

b. Calculate the after-tax proceeds of its sale for $209,000.

c. Calculate the initial investment associated with the replacement project.