14 tax considerations are not involved calculating

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Unformatted text preview: w is calculated for a replacement decision. EXAMPLE Continuing with the Powell Corporation example, assume that the firm expects to be able to liquidate the new machine at the end of its 5-year usable life to net $50,000 after paying removal and cleanup costs. The old machine can be liquidated at the end of the 5 years to net $0 because it will then be completely obsolete. The firm expects to recover its $17,000 net working capital investment upon termination of the project. Both ordinary income and capital gains are taxed at a rate of 40%. From the analysis of the operating cash inflows presented earlier, we can see that the proposed (new) machine will have a book value of $20,000 (equal to the year-6 depreciation) at the end of 5 years. The present (old) machine will be fully depreciated and therefore have a book value of zero at the end of the 5 years. Because the sale price of $50,000 for the proposed (new) machine is below its initial installed cost of $400,000 but greater than its book value of $20,000, taxes will have to be paid only on the r...
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