P1113 Initial investment at various sale pricesEdwards Manufacturing Company (EMC) is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine under MACRS, using a 5-year recovery period. (See Table 4.2 on page 120 for the applicable depreciation percentages.) The new machine costs $24,000 and requires $2,000 in installation costs. The firm is subject to a 40% tax rate. In each of the following cases, calculate the initial investment for the replacement.

1. EMC sells the old machine for $11,000.
2. EMC sells the old machine for $7,000.
3. EMC sells the old machine for $2,900.
4. EMC sells the old machine for $1,500.

Table 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

	Percentage by recovery year a
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 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 depreciation using the half-year convention.

Year	Cost (1)	Percentages (from Table 4.2) (2)	Depreciation [(1) (2)] (3)
1	$40,000	20%	$ 8,000
2	40,000	32	12,800
3	40,000	19	7,600
4	40,000	12	4,800
5	40,000	12	4,800
6	40,000	5	2,000
Totals		100%	$40,000