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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