See Screenshot of question below. Thank you for your help! EQuestion Help P11-22
ID: 1170584 • Letter: S
Question
See Screenshot of question below. Thank you for your help!
EQuestion Help P11-22 (similar to 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 $209,000 and will require $29,800 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). A $26,000 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 $14,500 before taxes; the new machine at the end of 4 years will be worth $79,000 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 Data Table Tax on sale of new machine Total after-tax proceeds-new asset Proceeds from sale of old machine Tax on sale of old machine Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Total after-tax proceeds-old asset Change in net working capital Terminal cash flow Percentage by recovery year 7 years 14% 25% 18% 12% 9% 9% 9% 10 years 10% 18% 14% 12% 996 8% 5 years 20% 3 years 33% 45% 15% Recovery year 19% 12% 12% 5% 6% 5% 6% Totals 100% 100% 100% 100% Enter any number in the edit fields and then click Check Answer These percentages have been rounded to the nearest whole percent to simplify calculations whileExplanation / Answer
cost of new machine
209000
Year
cost
MACRS rate
Annual depreciation
installation cost
29800
1
238800
20%
47760
total cost of new machine
238800
2
238800
32%
76416
3
238800
19%
45372
proceeds from sale of new machine
79000
4
238800
12%
28656
less tax on sale of new machine
15361.6
total after tax sale proceeds-new assets
63638.4
63638.4
total accumulated depreciation
198204
Book value of machine at the end of year 4
238800-198204
40596
proceeds from sale of old machine =14500*(1-.4)
14500
sale price of machine
79000
less taxes- 40% of 14500
5800
gain on sale of new machine
79000-40596
38404
total after tax sale proceeds from old machine
8700
tax on gain on sale of machine
38404*40%
15361.6
change in net working capital
26000
after tax sale proceeds of new machine
79000-15361.6
63638.4
terminal cash flow
98338.4
cost of new machine
209000
Year
cost
MACRS rate
Annual depreciation
installation cost
29800
1
238800
20%
47760
total cost of new machine
238800
2
238800
32%
76416
3
238800
19%
45372
proceeds from sale of new machine
79000
4
238800
12%
28656
less tax on sale of new machine
15361.6
total after tax sale proceeds-new assets
63638.4
63638.4
total accumulated depreciation
198204
Book value of machine at the end of year 4
238800-198204
40596
proceeds from sale of old machine =14500*(1-.4)
14500
sale price of machine
79000
less taxes- 40% of 14500
5800
gain on sale of new machine
79000-40596
38404
total after tax sale proceeds from old machine
8700
tax on gain on sale of machine
38404*40%
15361.6
change in net working capital
26000
after tax sale proceeds of new machine
79000-15361.6
63638.4
terminal cash flow
98338.4