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Terminal cash flow: Replacement decision 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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dolla S 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 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 Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year 5 years 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 5% 100% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100%

Terminal cash flow: Replacement decision 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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dolla S 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 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 Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year 5 years 7 years 20% 14% 32% 25% 19% 18% 12% 12% 12% 5% 100% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100%

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 10P
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Terminal cash flow: Replacement decision 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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dolla 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 $ $ $ $ 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 Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year* 5 years 7 years 20% 14% 32% 19% 12% 12% 5% 100% 25% 18% 12% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% - X
Transcribed Image Text:Terminal cash flow: Replacement decision 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 $198,000 and will require $29,600 in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table for the applicable depreciation percentages). 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 $13,500 before taxes; the new machine at the end of 4 years will be worth $74,000 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 21% tax rate. The terminal cash flow for the replacement decision is shown below: (Round to the nearest dolla 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 $ $ $ $ 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 Recovery year 1 2 3 4 5 6 7 8 9 10 11 Totals 3 years 33% 45% 15% 7% 100% Percentage by recovery year* 5 years 7 years 20% 14% 32% 19% 12% 12% 5% 100% 25% 18% 12% 9% 9% 9% 4% 100% 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 4% 100% - X
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