Question

Calculating initial investment   Vastine​ Medical, Inc., is considering replacing its existing computer​ system, which was purchased 3 years ago at a cost of $322,000. The system can be sold today for $204,000. It is being depreciated using MACRS and a​ 5-year recovery period​ (see the table. A new computer system will cost $501,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains.

a. Calculate the book value of the existing computer system.

b. Calculate the​ after-tax proceeds of its sale for $204,000.

c. Calculate the initial investment associated with the replacement project.

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%

*These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax​ purposes, be sure to apply the actual unrounded percentages or directly apply​double-declining balance​ (200%) depreciation using the​ half-year convention.​

Answer 1