Question

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 $ 207,000 and will require $ 30,500 in installation costs. It will be depreciated under MACRS using a​ 5-year recovery period​ (see the table for the applicable depreciation​ percentages).

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 $ 27,000 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 $ 14,800 before​ taxes; the new machine at the end of 4 years will be worth $ 75,000 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 $

Tax on sale of new machine

Total after-tax proceeds-new asset $

Proceeds from sale of old machine $

Tax on sale of old machine

Total after-tax proceeds-old asset $

Change in net working capital

Terminal cash flow $

Answer 1

Answer:- Terminal cash flow for the replacement decision is $79270

Calculations

Proceeds from sale of new machine	$75000
Tax on sale of new machine (NOTE 1)	$13850
Total after-tax proceeds-new asset		$61150	A
Proceeds from sale of old machine	$14800
Tax on sale of old machine (NOTE 2)	$5920
Total after-tax proceeds-old asset		$8880	B
Change in net working capital		$27000	C
TERMINAL CASHFLOW		$79270	A-B+C

NOTES

NOTE 1.

total cost of machine = $207,000 + $30,500 = $237500

book value of new machine

Year	MACRS %	Depreciation	Book value
1	20%	$47,500	$190,000
2	32%	$76,000	$114,000
3	19%	$45,125	$68,875
4	12%	$28,500	$40,375

Book value at the end of year 4 = $40,375

	Sale price of new machinery	$75000
	Book value	$40,375
	Profit on sale	$34625
	Tax on profit on sale	$13850
NOTE 2	Sale price of new machinery	$14800
	Book value	0
	Profit on sale	$14800
	Tax on profit on sale	$5920