Question

Central Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $ 46,800​, and this amount was being depreciated under MACRS using a​ 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $ 75,300 and requires $ 4,300 in installation costs. The new machine would be depreciated under MACRS using a​ 5-year recovery period. The firm can currently sell the old machine for $ 55 comma 000 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 40 %. The revenues and expenses​ (excluding depreciation and​ interest) associated with the new and the old machines for the next 5 years are given in the table

New machine			Old machine
Year	Revenue	Expenses ​(excluding depreciation and​ interest)		Revenue	Expenses ​(excluding depreciation and​ interest)
1	$750,900	$719,900		$674,900	$660,000
2	750,900	719,900		676,900	660,000
3	750,900	719,900		680,900	660,000
4	750,900	719,900		678,900	660,000
5	750,900	719,900		674,900	660,000

(

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​%

contains the applicable MACRS depreciation​ percentages.) Note: The new machine will have no terminal value at the end of 5 years.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

b. Determine the incremental operating cash inflows associated with the proposed replacement.​ (Note: Be sure to consider the depreciation in year​ 6.)

c. Depict on a time line the relevant cash flows found in parts ​(a​) and ​(b​) associated with the proposed replacement decision.

a. Calculate the initial investment associated with replacement of the old machine by the new one.

Calculate the initial investment​ below:  ​(Round to the nearest​ dollar.)

Cost of new asset $

Installation costs

Total cost of new asset $

Proceeds from sale of old asset $

Tax on sale of old asset

Total proceeds, sale of old asset $

Initial investment $

Answer 1