Question
Terminal cash flowReplacement decisionRussell Industries is considering replacing a fully depreciated machine that has a remaining useful life of 10 years with a newer, more
Terminal cash flowReplacement decisionRussell 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 $193,000 and will require $29,200 in installation costs. It will be depreciated under MACRS using a 5-year recovery period 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 $13,300 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% tax rate.
Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes 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%
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
otal after-tax proceeds-old asset $
Change in net working capital
Terminal cash flow $
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