Question
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
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 $192,000 and will require $31,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table). A $ $22,000 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 $14,800 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 %
PROCEEDS FROM NEW SALE OF NEW MACHINE: $
TAX ON SALE OF NEW MACHINE:
PROCEEDS FROM SALE OF OLD MACHINE:
TAX ON SALE OF OLD MACHINE:
CHANGE IN NET WORKING CAPITAL:
TERMINAL CASH FLOW
3 years 5 years 7 years 10 years
33% 20% 14% 10%
45% 32% 25% 18%
15% 19% 18% 14%
7% 12% 12 % 12%
12% 9% 9%
5% 9% 8%
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