Question

P11–13 Initial investment at various sale prices Ed Mann, sole owner of Edward Mann Consulting (EMC) is 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 under MACRS, using a 5-year recovery period (see Table 4.2). 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 following cases, calculate the initial investment for the replacement.

Table 4.2

Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

	Percentage by recovery yeara
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%

1. EMC sells the old machine for $11,000.
2. EMC sells the old machine for $7,000.
3. EMC sells the old machine for $2,900.
4. EMC sells the old machine for $1,500.

I don't have a finance calculator. I have the TI84 PLus, please show work . thanks.

Answer 1

Old Machine:

Cost of Machine = $10,000

Depreciation, Year 1 = 20% * $10,000
Depreciation, Year 1 = $2,000

Depreciation, Year 2 = 32% * $10,000
Depreciation, Year 2 = $3,200

Depreciation, Year 3 = 19% * $10,000
Depreciation, Year 3 = $1,900

Book Value = $10,000 - $2,000 - $3,200 - $1,900
Book Value = $2,900

Cost of New Machine = $24,000
Installation Cost = $2,000

Answer a.

Proceed from Sale of Old Machine = Salvage Value - (Salvage Value - Book Value) * tax
Proceed from Sale of Old Machine = $11,000 - ($11,000 - $2,900) * 0.40
Proceed from Sale of Old Machine = $7,760

Initial Investment = Cost of New Machine + Installation Cost - Proceed from Sale of Old Machine
Initial Investment = $24,000 + $2,000 - $7,760
Initial Investment = $18,240

Answer b.

Proceed from Sale of Old Machine = Salvage Value - (Salvage Value - Book Value) * tax
Proceed from Sale of Old Machine = $7,000 - ($7,000 - $2,900) * 0.40
Proceed from Sale of Old Machine = $5,360

Initial Investment = Cost of New Machine + Installation Cost - Proceed from Sale of Old Machine
Initial Investment = $24,000 + $2,000 - $5,360
Initial Investment = $20,640

Answer c.

Proceed from Sale of Old Machine = Salvage Value - (Salvage Value - Book Value) * tax
Proceed from Sale of Old Machine = $2,900 - ($2,900 - $2,900) * 0.40
Proceed from Sale of Old Machine = $2,900

Initial Investment = Cost of New Machine + Installation Cost - Proceed from Sale of Old Machine
Initial Investment = $24,000 + $2,000 - $2,900
Initial Investment = $23,100

Answer d.

Proceed from Sale of Old Machine = Salvage Value - (Salvage Value - Book Value) * tax
Proceed from Sale of Old Machine = $1,500 - ($1,500 - $2,900) * 0.40
Proceed from Sale of Old Machine = $2,060

Initial Investment = Cost of New Machine + Installation Cost - Proceed from Sale of Old Machine
Initial Investment = $24,000 + $2,000 - $2,060
Initial Investment = $23,940