Initial Investment: Basic calculation Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 3 years ago at an instaled cost of $20,000; it was being depreciated under MACRS using a 5-year recovery period. (See table 4.2 for the applicable depreciation percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine cost $35,000 and requires $5,000 in installation costs; it will be depreciated using a 5-year recovery period under MACRS. The existing machine can currently be sold for $25,000 without incurring any removal or cleanup costs. the firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

Table 4.2

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%