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Terminal cash

flowReplacement

decisionRussell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost

$196,000

and will require

$29,100

in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table

LOADING...

for the applicable depreciation percentages). A

$23,000

increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate the potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net

$16,200

before taxes; the new machine at the end of 4 years will be worth

$76,000

before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a

40%

tax rate.

The terminal cash flow for the replacement decision is shown below:(Round to the nearest dollar.)

Proceeds from sale of new machine	$
Tax on sale of new machine
Total after-tax proceeds-new asset			$
Proceeds from sale of old machine	$
Tax on sale of old machine
Total after-tax proceeds-old asset			$
Change in net working capital
Terminal cash flow			$

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%

5 years Terminal cash flowReplacement decision Russell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more sophisticated machine. The new machine will cost $196,000 and will require $29,100 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $23,000 increase in net working capital will be required to support the new machine. The firm's managers plan to evaluate potential replacement over a 4-year period. They estimate that the old machine could be sold at the end of 4 years to net $16,200 before taxes; the new machine at the end of 4 years will be worth $76,000 before taxes. Calculate the terminal cash flow at the end of year 4 that is relevant to the proposed purchase of the new machine. The firm is subject to a 40% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dollar.) - X Data Table Proceeds from sale of new machine $ Tax on sale of new machine Total after-tax proceeds-new asset (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Proceeds from sale of old machine $ Rounded Depreciation Percentages by Recovery Year Using MACRS for Tax on sale of old machine First Four Property Classes Total after-tax proceeds-old asset Percentage by recovery year Recovery year 3 years 7 years 10 years Change in net working capital 1 33% 20% 14% 10% Terminal cash flow $ 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 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