Answered: Terminal cash flow—Replacement…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 4E: Determine cash flows Natural Foods Inc. is planning to invest in new manufacturing equipment to make...

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Question

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

$200,000

and will require

$29,100

in installation costs. It will be depreciated under MACRS using a 5-year recovery period (see the table

for the applicable depreciation percentages). A

$29,000

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

$14,400

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

40%

tax rate

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