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 $195,000 and will require $30,300 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table
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% |
for the applicable depreciation percentages). A $30,000 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 $73,000 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. The terminal cash flow for the replacement decision is shown below:(Round to the nearest dollar.)
Proceeds from sale of new machine | $ |
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Tax on sale of new machine |
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|
|
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Total after-tax proceeds-new asset |
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| $ |
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Proceeds from sale of old machine | $ |
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Tax on sale of old machine |
|
|
|
|
Total after-tax proceeds-old asset |
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| $ |
|
Change in net working capital |
| |||
Terminal cash flow | $ |
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