Question
Please show formulas P1111 Calculating initial investmentVastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost
Please show formulas
P1111 Calculating initial investmentVastine 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, page 120.) 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 40% tax rate.
Calculate the book value of the existing computer system.
Calculate the after-tax proceeds of its sale for $200,000.
Calculate the initial investment associated with the replacement project.
PROBLEM 11-11 | |||
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a. | Book Value = |
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b. | After-tax proceeds: |
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| Sales price of old equipment |
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| Book value of old equipment |
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| Recapture of depreciation |
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| Taxes on recapture of depreciation |
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| After-tax proceeds |
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c. | Initial investment: |
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| Cost of new machine |
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| Less: Sales price of old machine |
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| Plus: Tax on recapture of depreciation |
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| Initial investment |
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