Terminal cash flow: Replacement 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 $208,000 and will require $29000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period.

Terminal cash flow: Replacement 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 $208,000 and will require $29,000 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $29,000 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 $15,500 before taxes; the new machine at the end of 4 years will be worth $80,000 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 21% 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 III Terminal cash flow $ 7 years 10 years Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 1 33% 20% 14% 2 45% 32% 25% 3 15% 19% 18% 4 7% 12% 12% 5 12% 9% 6 5% 9% 7 9% 8 4% 9 10 11 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% Totals 100% 100% 100%