Question

Cushing Corporation is considering the purchase of a new grading machine to replace the existing one. The existing machine was purchased 4 years ago at an installed cost of $ 20 comma 300​; it was being depreciated under MACRS using a​ 5-year recovery period.​ (See table LOADING... for the applicable depreciation​ percentages.) The existing machine is expected to have a usable life of at least 5 more years. The new machine costs $ 35 comma 400 and requires $ 4 comma 500 in installation​ costs; it will be depreciated using a​ 5-year recovery period under MACRS. The existing machine can currently be sold for $ 25 comma 100 without incurring any removal or cleanup costs. The firm is subject to a 40 % tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine.

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%
              

Answer 1

Answer:

The existing machine was purchased 4 years ago at an installed cost of $ 20 comma 300​; it was being depreciated under MACRS using a​ 5-year recovery period.

Accumulated depreciation of existing machine = 20,300 * (20% + 32% + 19% + 12%) = $16,849

Book value of existing machine = Installed cost - Accumulated depreciation = 20300 - 16849 =$3,451

The existing machine can currently be sold for $ 25 comma 100 without incurring any removal or cleanup costs. The firm is subject to a 40 % tax rate.

Hence, gain on sale of machine = 25100 - 3451 = $21,649

Tax on gain = 21649 * 40% =$8,659.60

Sale value of existing machine net of tax = 25100 - 8659.60 =$16,440.40

Initial investment associated with the proposed purchase of a new grading machine = New Machine cost + Installation cost - Sale value of existing machine net of tax

= 35400 + 4500 - 16440.40

=$23,459.60

Initial investment associated with the proposed purchase of a new grading machine = $23,459.60