Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $318,000. The system can be sold today for $194,000. It is being depreciated using MACRS and a 5-year recovery period (see the table LOADING... ). A new computer system will cost $496,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the book value of the existing computer system. b. Calculate the after-tax proceeds of its sale for $194,000. c. Calculate the initial investment associated with the replacement project.
Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $318,000. The system can be sold today for $194,000. It is being depreciated using MACRS and a 5-year recovery period (see the table LOADING... ). A new computer system will cost $496,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 40% tax rate on ordinary income and capital gains. a. Calculate the book value of the existing computer system. b. Calculate the after-tax proceeds of its sale for $194,000. c. Calculate the initial investment associated with the replacement project.
Century 21 Accounting Multicolumn Journal
11th Edition
ISBN:9781337679503
Author:Gilbertson
Publisher:Gilbertson
Chapter19: Accounting For Plant Assets, Depreciation, And Intangible Assets
Section19.5: Declining-balance Method Of Depreciation
Problem 1OYO
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Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased
depreciated using MACRS and a 5-year recovery period (see the table
A new computer system will cost
working capital . Assume a
capital gains.
3
years ago at a cost of
$318,000.
The system can be sold today for
$194,000.
It is being LOADING...
).$496,000
to purchase and install. Replacement of the computer system would not involve any change in net 40%
tax rate on ordinary income and a. Calculate the book value of the existing computer system.
b. Calculate the after-tax proceeds of its sale for
$194,000.
c. Calculate the initial investment associated with the replacement project.
Transcribed Image Text:Data Table
(Click on the icon here in order to copy the contents of the data table below into a spreadsheet.)
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%
6%
10
6%
11
4%
Totals
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the
half-year convention.
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