P11-11 Calculating initial investment Miller Dental, Inc. is considering replacing its existing laser checking system, which was purchased 3 years ago at a cost of $568,000. The laser checking system can be sold for a lump sum of $253,000. It is being depreci- ated using MACRS and a 5-year recovery period (see Table 4.2, page 166). A new laser checking system will cost $870,000 to purchase and install. Replacement of the planned laser checking system would not involve any change in net working capital. Assuming a 20% tax rate, calculate the following: a. The book value of the existing laser checking system. b. The after-tax proceeds of its sale for $253,000. c. The initial investment associated with the replacement project. P11-13 Initial investment at various sale prices Edwards Manufacturing Company (EMC) is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine un- der MACRS, using a 5-year recovery period. (See Table 4.2 on page 166 for the ap- plicable depreciation percentages. The new machine costs $24,000 and requires $2,000 in installation costs. The firm is subject to a 40% tax rate. In each of the fol- lowing cases, calculate the initial investment for the replacement. a. EMC sells the old machine for $11,000. b. EMC sells the old machine for $7,000. c. EMC sells the old machine for $2,900. d. EMC sells the old machine for $1,500. P11-14 Calculating initial investment DuPree Coffee Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed computer-controlled auto- matic-feed roaster will be $130,000. The firm has a chance to sell its 4-year-old roaster for $35,000. The existing roaster originally cost $60,000 and was being de- preciated using MACRS and a 7-year recovery period. (See Table 4.2 on page 166 for the applicable depreciation percentages.) Dupree is subject to a 40% tax rate. a. What is the book value of the existing roaster? b. Calculate the after-tax proceeds of the sale of the existing roaster. c. Calculate the change in net working capital using the figures given in the follow- ing table. Anticipated Changes in Current Assets and Current Liabilities Accruals -$20,000 Inventory + 50,000 Accounts payable +40,000 Accounts receivable + 70,000 Cash 0 Notes payable + 15,000 d. Calculate the initial investment associated with the proposed new roaster. TAE 4.2 5 years Recovery year 1 2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Properly Classes Percentage by recovery year 3 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 8 7 3 4 5 6 7 8 6 9 10 11 Totals 100% 100% 100% 100% "These percentages have been rounded to the nearest whole percent to simplify calculations while retain- ing realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention
