Initial investment -Basic Calculation Vastine Medical, Inc., is considering repl
ID: 2982454 • Letter: I
Question
Initial investment -Basic Calculation Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using MACRS and a 5 year recovery period. A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate.
a. Calculate the book value of the existing computer system.
b. Calculate the after-tax proceeds of its sale for $200,000.
c. Calculate the initial investment associated with the replacement project.
Explanation / Answer
(a) Book value = ($325,000