Calculating initial investment Vastine Medical Inc. is replacing its 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. 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.

1. Calculate the book value of the existing computer system (see Table 4.2).

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

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

TABLE 4.2

Percentage by recovery yeara
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%