Calculating initial investment Vastine Medical, Inc., is considering replacing its existing computer system, which was purchased 3 years ago at a cost of $315,000. The system can be sold today for $205,000. It is being depreciated using MACRS and a 5-year recovery period (see the table E). A new computer system will cost $508,000 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 $205,000. c. Calculate the initial investment associated with the replacement project. A Data Table
a. The remaining book value is $ (Round to the nearest dollar.) (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) b. The after-tax proceeds will be $ C. The initial investment will be $ . (Round to the nearest dollar.) (Round to the nearest dollar.) 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 33% 20% 14% 45% 32% 25% 15% 19% 18% 12% 12% 12% 5% 7% NMOOO 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% 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. Print Don
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