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 on ordinary income and capital gains.

Table 4.2 below:

"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%

a.

Calculate the book value of the existing computer system.

b.

Calculate the after-tax proceeds of its sale for $200,000.

c.

Calculate the initial investment associated with the replacement project. What would the initial investment be if the new computer qualified for 100% bonus depreciation?