Question

Calculating initial investment : DuPree Coffee? Roasters, Inc., wishes to expand and modernize its facilities. The installed cost of a proposed? computer-controlled automatic-feed roaster will be $138,000. The firm has a chance to sell its 44?-year-old roaster for $35,600. The existing roaster originally cost $59,100and was being depreciated using MACRS and a? 7-year recovery period? (see the table below) . DuPree pays taxes at a rate of 40% on ordinary income and capital gains.

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%

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 following? figures:

Anticipated Changes in Current Assets and Current Liabilities
Accruals	-$19,000
Inventory	+50,800
Accounts payable	+39,300
Accounts receivable	+69,800
Cash	0
Notes payable	+14,000

d. Calculate the initial investment associated with the proposed new roaster.

Answer 1

a) The existing roaster was depreciated using MACRS with a 7-year recovery period. But, its 44-years old. (is it 4 or 44?)Therefore, it would be fully depreciated by now.

Book value of existing roaster = $0

b) After - tax proceeds of the sale of existing roaster = salvage value x (1 - tax rate) = $35,600 x (1 - 0.40) = $21,360

c) Change in net working capital = changes in current assets - changes in current liabilities

or, Change in net working capital = [Increase in inventory + Increase in Accounts receivable - Decrease in accruals] - [Increase in accounts payable + increase in notes payable]

or, change in net working capital = [$50,800 + $69,800 - $19,000] - [$39,300 + $14,000] = $48,300

d) Initial investment = Cost of new roaster + working capital required - salvage value of existing roaster net of tax

or, Initial investment = $138,000 + $48,300 - $21,360 = $164,940

If the old roaster is 4 years old -

a) The total depreciation for 4 years = 14% + 25% + 18% + 12% = 69%

Book value of old roaster = Cost - Depreciation = $59,100 - ($59,100 x 69%) = $18,321

b) After - tax proceeds of the sale of existing roaster = salvage value - [ (Salvage value - Book value) x tax rate ]

or, After - tax proceeds of the sale of existing roaster = $35,600 - [ ($35,600 - $18,321) x 40% ] = $28,688.4

c) Same as 44-year old solution

d) Initial investment = $138,000 + $48,300 - $28,688.40 = $157,611.60