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LG4 LG5 LG6 ST 8–2 Determining relevant cash flows A machine currently in use was originally purchased 2 years ago for $40,000. The machine is being depreciated under
MACRS using a 5-year recovery period; it has 3 years of usable life remaining.
The current machine can be sold today to net $42,000 after removal and
cleanup costs. A new machine, using a 3-year MACRS recovery period, can be
purchased at a price of $140,000. It requires $10,000 to install and has a 3-year
usable life. If the new machine is acquired, the investment in accounts receivable
will be expected to rise by $10,000, the inventory investment will increase by
$25,000, and accounts payable will increase by $15,000. Profits before depreciation and taxes are expected to be $70,000 for each of the next 3 years with the
old machine and to be $120,000 in the first year and $130,000 in the second
and third years with the new machine. At the end of 3 years, the market value of
the old machine will equal zero, but the new machine could be sold to net
$35,000 before taxes. Both ordinary corporate income and capital gains are sub...
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- Fall '13